Newspaper outlets report on the press releases issued by the Department of Justice's civil lawsuit against Standard & Poor's (S&P). There is speculation that this may only be the first lawsuit in a series of potential lawsuits arising out of the causes of the Great Recession insofar as they involved the conduct of the credit rating agencies. See Andrew Ross Sorkin and Mary Williams Walsh, "U.S. Accuses S&P of Fraud in Suit on Loan Bundles" (New York Times Online "Dealbook" Blog posted on Monday, February 4, 2013). It is interesting that part of the Department of Justice's Claim against S&P is that S&P used incorrect computer models to gauge risk. See Peter Eavis, "U.S. Contends S&P Purposely Used Faulty Models" (New York Times Online "Dealbook" Blog posted on Tuesday, February 5, 2013).
As securitizations and related deals became more and more complex, investors and dealmakers relied more and more on credit rating agencies to spend the time required to evaluate the credit-worthiness of these complex deals. Reliance on the credit ratings agencies became -- and still is -- so pervasive that Federal Statutes identified the agencies by name or by listing characteristics that only they could meet, whenever credit-worthiness was at issue.
The many demonstrated failures of the credit rating agencies include the AAA ratings they incorrectly gave to Residential Mortgage Backed Securities or RMBS. See Jessica Silver-Greenberg, "E-Mails Imply JPMorgan Knew Some Mortgage Deals Were Bad" (New York Times Online "Dealbook" post on February 6, 2013). Parenthetically, every time I read that headline, I want to say, "Do ya think?" It should be noted here that most newspapers, including the New York Times, do not allow reporters to write their own headlines; editors are employed to do that.
This has led to huge Claims on Mortgage Insurance Policies and on Title Insurance Policies. See "Mortgage Insurance" and "Title Insurance" Categories on this Blog, and also on Insurance Claims and Issues Blog.
There is a question whether the credit rating agencies were ever fully accepted as a part of the financial framework governing the United States at this time. If they are, then I predict that the lawsuit filed by the Department of Justice against S&P over S&P's alleged misconduct and mis-rating of the credit-worthiness of certain securities, will resemble the settlements reached by such other Federal agencies and commissions as the Securities and Exchange Commission and the Office of the Comptroller of the Currency with investment banks over those banks' alleged misconduct which caused or contributed to the causes of the Great Recession. I predict that in that event, the reported Department of Justice civil lawsuit against S&P will be settled, and that the settlement will include a fine which will probably be less, perhaps much less, than 50% of the money S&P made from the alleged mis-rating, and that S&P will settle without admitting liability.
If on the other hand S&P and the other credit rating agencies are not accepted as a part of the governing financial framework at this time, then I predict that in that event the lawsuit will still be settled but S&P will only be able to reach a settlement by admitting liability, to something.
Finally, in any case I predict that based on past experience of lawsuits filed by Federal agencies, commissions, and departments, that the reported civil lawsuit filed by the Department of Justice against S&P will never go to Trial. There are many reasons that all of the past-filed lawsuits all apparently have been settled, not the least of which are definitely fear of losing and perhaps a lack of capacity to try cases.
In any case, Mortgage Insurance Carriers and Title Insurance Companies can expect more of the same old, same old, unfortunately for them -- and for us.
Please Read The Disclaimer.
Comments