Mug’s Game
The Financial Express: Feb 08 2013, 20:56 IST
A key takeaway from the US Department of Justice’s lawsuit against ratings agency Standard & Poor’s is that there are two major faults that need to addressed in the ratings game. The key defence S&P is employing is that its ratings are just ‘opinions’ and as such are protected under the First Amendment. This is a spurious argument. Transcripts of messages between S&P analysts, revealed during the court proceedings, clearly show that they knew the junk status of the securities they were rating AAA. More importantly, the transcripts show the analysts were fully aware of the danger to the entire financial system they were posing through their actions. “Let’s hope we are all wealthy and retired by the time this house of cards falters,” one analyst reportedly wrote in an email to his colleagues. The complaint also says that the S&P analysts even sang and danced about ‘bringing down the house’ to the tune of a popular Talking Heads song of a similar name. Why should this kind of deceit be protected under the First Amendment?
Why they lied leads us to the second grave flaw with the ratings system. Ratings agencies receive their fees, not from investors, but from the very institutions whose products they are rating. This is a sure-fire recipe for a conflict of interests. Indeed, as the transcripts show, several analysts were concerned about the fact that S&P was losing business to other agencies as it was deemed too conservative. They rectified this soon. While the US
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