Standard & Poor's, as you may have heard, is fighting a federal lawsuit with a potentially 10-figure pricetag that accuses it of making up whatever CDO ratings it had to in order to win business rating CDOs. Its defense against these charges are (a) no one should listen to them and (b) that no matter how shady and underhanded their practices seem, the ratings they produced were fine, even if they were totally wrong.
You may note the absence of (c) we did not make up ratings to appease the people who pay for ratings. Which may have something to do with the fact that S&P is still kinda making up ratings to appease the people who pay for them.
During a meeting at Standard & Poor’s New York offices in the summer of 2012, analysts responsible for rating bonds tied to home loans were informed that their unit had sustained big losses in the previous quarter….
An employee at the summer meeting, who spoke on the condition of anonymity out of fear of retribution from the company, said that the analysts were not told explicitly to relax their standards to win back business. But he said that the numbers made it clear that if the division wanted to stay afloat, the analysts would have to make changes.
A few months later, they did exactly that, introducing modified standards that made it easier to give bonds higher ratings.
The changes seemed to work. More banks began choosing S.& P. to rate the new bonds backed by residential mortgages. S.& P., in turn, faced criticism from industry participants who worried that the changes were allowing lower-quality bonds to make it into the market.
The change had nothing to do with "commercial considerations," an S&P spokesman said. It was merely about applying to the residential mortgage market a "method that had already been applied by S&P elsewhere."
There are two things to consider in that response. The first is (a), referenced above. The second is that the line about a "method that had already been applied by S&P elsewhere" is true, but…
The changes, in November 2012, came just two months after analysts in a related part of S.& P. modified their standards for bonds backed by commercial real estate mortgages after that unit had also struggled to win business. An earlier analysis by The New York Times found that those changes allowed S.& P. to give higher ratings than its competitors and to capture more business….
On nearly every deal since it changed its standards, S.& P. has been willing to make more optimistic predictions about the bonds it was rating than the other agencies rating the deals, according to analysis of data from company reports.