Investigating The Ratings Agencies

“Too little. Too late.”
That’s how New York Attorney General Andrew Cuomo described the reforms proposed by Standard & Poor’s and Moody’s Investors Service in the wake of the subprime debt ratings catastrophe. Both S&P and Moody’s have recently announced plans to strengthen their ratings system in an attempt to restore their credibility and fend off regulatory or legislative action. But these proposals—which include rating have been met with skepticism and mockery. (More mockery here.) Cuomo referred to them as “supposed reforms.”
“Both S&P and Moody’s are attempting to make piece-meal changes that seem more like public relations window dressing than systemic reform,” Cuomo said in a statement about his investigation into the ratings agency.
Cuomo didn’t describe exactly what actions his office is planning on taking, but according to Charlie Gasparino and the Wall Street Journal he is considering employing the Martin Act to go after wrong-doing in the mortgage meltdown. This is the breathtakingly powerful state securities law that grants the Attorney General broad investigatory and prosecutorial powers. It lay nearly dormant for three-quarters of a century after it was passed. The Martin Act was used to go after smaller boiler room type operations but never against the big Wall Street firms. At least, not until Eliot Spitzer discovered the law and used it to tear into Merrill Lynch. After that, Spitzer rampaged across Wall Street wielding the Martin Act to force enormous settlements from a dozen or so firms.
Why is the Martin Act such a big deal? A 2004 Legal Affairs article by Nicholas Thompson describes the terrifying power of the AG under the law:

To win a case, the AG doesn’t have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded. Plus, when the prosecution is over, trial lawyers can gain access to the hoards of documents that the act has churned up and use them as the basis for civil suits. “It’s the legal equivalent of a weapon of mass destruction,” said a lawyer at a major New York firm who represents defendants in Martin Act cases (and who didn’t want his name used because he feared retribution by Spitzer). “The damage that can be done under the statute is unlimited.”

Interestingly, Spitzer first hatched the plan to use the Martin Act against Wall Street after a meeting with a securities lawyer named Eric Dinallo—the same guy who has been attempting to strong arm Wall Street into bailing out Ambac.
Cuomo Says S&P, Moody’s Reforms Won’t Stop His Probe [Bloomberg]

Comments (19)

  1. Posted by Anonymous | February 7, 2008 at 4:54 PM

    Another good post from Ron Blarney.

  2. Posted by Same Anonymous as 4:54, just pressed | February 7, 2008 at 4:56 PM

    Carney, how about a post on what MBIA’s credit rating should be given their borrowing rates?

  3. Posted by @ 4:54 | February 7, 2008 at 5:29 PM

    carney, don’t you think writing comments abt yourself is tacky?

  4. Posted by Anonymous | February 7, 2008 at 6:00 PM

    Hey, you gotta give rights to the terrorists first!

  5. Posted by Anonymous | February 7, 2008 at 9:52 PM

    From a moronic post earlier today regarding presure on the rating agencies:
    “and where exactly is this alleged “pressure” mounting from? i doubt any of the powers that be with the juice to apply pressure are enthusiastic about the idea of further downgrades of the monolines. ”
    I don’t think junior understands the enforcement potential the Martin Act bears.

  6. Posted by Me | February 7, 2008 at 10:17 PM

    Did you see CNBC with Charlie Gasparino and Richard Larkin talking with Dylan Ratsmacker about this topic. Anyway, halfway into the interview Larkin says something, and then Charlie says, “I love dick, but…”
    Get it, “I love dick…”
    You have to see the clip. It’s too much and I’m not as Beavis and Butthead as you might think from this post.

  7. Posted by Anonymous | February 8, 2008 at 7:51 AM

    @9:52 okay smartass you tell me who is going to force the agencies to cause the kind of financial disruption that will result from an honest downgrade of the monolines to junk. what bright politician wants to step up and be the one responsible for that?
    i await your response.

  8. Posted by Anonymous | February 8, 2008 at 7:59 AM

    FYI geniuses the seeking changes are about how they rate structured deals not whether or not they should downgrade MBIA or Ambac, it is pretty well universally agreed that the corporate rating methodology does not change.
    Most financials are posting metrics that would qualify them for junk status. I have yet to hear a call to rate them as such because these companies are done on profitability over a cycle not based on cum loss and other assumptions.

  9. Posted by Anonymous | February 8, 2008 at 10:45 AM

    7:51:
    “Who is going to….”
    Why don’t you scroll up and read the fucking article.

  10. Posted by Anonymous | February 8, 2008 at 11:17 AM

    Who is unwinding their CDO today? CDS spreads are though the roof… It appears to be euro in nature… any desk jockeys here to comment?

  11. Posted by Anonymous | February 8, 2008 at 11:30 AM
  12. Posted by Anonymous | February 8, 2008 at 11:32 AM

    @10:45 read the fucking original post that had the comment you reproduced. about, dipshit. nobody is pressuring anyone to lower the ratings on monolines. just because you can spell “Martin Act” doesn’t mean shit. this is entirely off the original topic. you really should clean that sand out of your vagina.

  13. Posted by Anonymous | February 8, 2008 at 11:54 AM

    I’ll lay it out nice and slow for you….
    The insurers insured a bunch of high rated debt, that business was written to a zero loss which meand there is very little room for error.
    It turns out much of that debt is not investment grade it’s junk.
    The rating agencies are incorrectly (I think we all agree on that) maintaining higher ratings on the debt.
    AC is trying to make the agencies accurately rate the debt.
    When this happens the insurers will be insolvent, thus most likely not to maintain their AAAs.
    (They insured a LOT of stuff that wasn’t supposed to default, a LOT of that stuff is going to default. The ratings agencies aren’t reflecting that change & AC is going to use the Martin Act to get them to accurately rate the paper. It will work, and MBIA and Ambac will go away.)
    The significance of the Martin Act is because the SEC could never do this. And if you think that AC doesnt know that these downgrades are going to cost monolines their AAA youre kidding yourself.

  14. Posted by Anonymous | February 8, 2008 at 12:04 PM

    Are you suggesting that the AG wants S&P to downgrade MBIA to CCC just so that the bonds it currently insures that have weak underlying would also be rated CCC? Because these things are rated based on the strength of the insurer. If the underlying degenerates it does not change the insured rating. That is the only way you get the bond rated to its standalone strength, to downgrade the insurer.

  15. Posted by Anonymous | February 8, 2008 at 12:06 PM

    Wow you guys. downgrades to bonds don’t cause downgrades to guaranty companies. actual loss experience is what should cause downgrades to monolines.
    what the AG is saying is you rated all your structured products wrong, and you should pay up for it. not you rated the monolines wrong.

  16. Posted by Anonymous | February 8, 2008 at 12:10 PM

    second 12:06

  17. Posted by Anonymous | February 8, 2008 at 12:33 PM

    12:06, no, expected loss experience should cause downgrades. I’m assuming(based on the evidence) the monolines ‘rated’ the stuff wrong too, and that’s why they should be downgraded.
    If I’m an insurer with $1b of capital insuring a $1 trill of AAA debt and I get a AAA rating.
    If I’m the same insurer with $1b of capital insuring a 1 trill of B debt, do you think I’m still going to get AAA?

  18. Posted by Anonymous | February 8, 2008 at 1:39 PM

    now you are splitting hairs. the point still stands that they are NOT pressing for a downgrade to the monolines but rather interested in the rating methodology of asset backed products.

  19. Posted by Anonymous | February 8, 2008 at 3:21 PM

    no it’s not splitting hairs at all.
    Ignore the ratings game, here’s the reality of it
    The bond insurers charged a AA insurance premium to insure B- debt, and they are now virtually insolvent.
    If the ratings agencies want to offer an accurate picture of reality they should downgrade them. Yeah it will really really suck but that’s where we are.
    Relevant to a later post, it’s like saying because US banking system hasn’t adopted Basel II we’re not out of compliance with Basel II and that makes us better off.