Editor: David Reiss
Brooklyn Law School

April 25, 2013

S&P Myth #1: No One Could Have Known

By David Reiss

S&P filed its Memorandum in Support of Defendants’ Motion To Dismiss the DoJ lawsuit filed back in February. The memorandum states that S&P’s inability, along with other market participants, “to predict the extent of the most catastrophic meltdown since the Great Depression reveals” only “a lack of prescience” and “not fraud.” (1) This short phrase requires some serious unpacking.

First, it ignores the fact that many of the analysts who engaged in fact-based investigations of the rated securities were sounding warnings but were overruled by higher ups who demanded that market share be maintained.  So if S&P and “other market participants” is defined to exclude all of those analysts, risk officers, underwriters and due diligence providers that worked for all of those market participants, then S&P is certainly right.  But if plaintiffs can demonstrate that facts were ignored to the extent that short term profits would be hurt by them, then S&P’s characterization is less compelling.

A second related point is that S&P’s argument that “its views were consistent with those of virtually every other market participant” is not compelling if plaintiffs can demonstrate that it ignored the facts before it and the findings of its own models.

Finally, its characterization of the Subprime Bust as “the most catastrophic meltdown since the Great Depression” fails to acknowledge that an S&P AAA rating offers quite the stamp of approval:  “An issuer or obligation rated ‘AAA’ should be able to withstand an extreme level of stress and still meet its financial obligations. A historical example of such a scenario is the Great Depression in the U.S.”  (The quote is from S&P’s website and can be accessed here on page 58.) But mortgage-backed securities with that S&P triple A did not quite live up to their promise.

This is not to say that S&P has not raised serious legal issues with Justice’s complaint in its motion to dismiss, but just that its rationalizations of its own behavior (which echo those of Dick Fuld and many others at the helm of various “market participants”) don’t stand up against the record.

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