"Standard & Poor's has long had strict policies to reinforce the independence of our analytical processes. . . . We make our methodology transparent to the market."
That was among the responses of a spokesperson for the ratings agency Standard & Poor's when I contacted him a few weeks ago in advance of a new Rolling Stone feature, "The Last Mystery of the Financial Crisis," which describes the role the ratings agencies played in causing the 2008 crash. The company was genuinely miffed that anyone would impugn its honesty. In one relatively brief e-mail, the spokesperson used variables of terms like "independent," "integrity" and "transparent," upwards of nine times.
Hold that thought.
"The Last Mystery of the Financial Crisis" makes great use of documents uncovered in years of painstaking research by attorneys at Robbins Geller Rudman & Dowd, a San Diego-based firm that was at the forefront of major lawsuits against the industry. The material those lawyers found leaves virtually no doubt that the great ratings agencies like Moody's and S&P essentially put their analysis up for sale in the years leading up to the crash.
I picked some of the more damaging of these documents to ask about. Like for instance, an email from a company executive reading, "Lord help our fucking scam. . . . This has to be the stupidest place I have worked at."
Out of context, they said.
What about other highly suggestive emails, like the one in which an analyst joked that "we have just stuck our preverbal [sic] finger in the air!!", or the one in which an analyst admitted his quantitative model was only marginally more reliable than "flipping a coin"?
Not only cherry-picked and out of context, but "contradicted by other evidence," is how the S&P man put it.
"They do not reflect our culture, integrity or how we do business," he said. Note the word integrity again.
I point this out because the ratings agencies' responses to the questions we posed for the piece were almost as revealing as the extremely damaging emails and internal documents the Robbins Geller lawyers uncovered.
It wasn't just that there was apparently an entire generation of internal email correspondence that had been taken out of context (apparently, the context was taken out of context). More interesting was another line of defense.
Not long before I contacted them, S&P had made, in a very graphic and comical manner, a very strange argument in court. In an attempt to dismiss a federal Justice Department lawsuit pending against S&P, the company had, in a court motion, cited a Florida court case, Boca Raton Firefighters and Police Pension Fund v. Bahash.
In that case, the Second Circuit ruled that the plaintiffs suing S&P could not make a fraud claim based upon the company's reassurances in its Code of Conduct of its "objectivity, integrity and independence."
Moreover, the Court said, plaintiffs could not make a claim based on a public statement by S&P touting its "credibility and reliability," or another saying, "[S&P] has a longstanding commitment to ensuring that any potential conflicts of interest do not compromise its analytical independence."
Why, you might ask, could one not make a fraud claim based upon those statements? Because, the Second Circuit ruled, those statements were transparently not meant to be taken seriously. The following passage is a summary written by S&P's own lawyers describing the Second Circuit ruling (emphasis mine):
The Second Circuit affirmed the district court's dismissal of the plaintiffs' claims in their entirety, finding that the statements concerning the "integrity and credibility and the objectivity of S&P's credit ratings" were exactly "the type of mere 'puffery' that we have previously held not to be actionable."
More from that same memo from S&P's lawyers:
The Court found . . . that "generalizations about [S&P's] business practices and integrity" were "so generalized that a reasonable investor would not depend on [those statements]. . . ."
Because S&P's statements about its objectivity, independence and integrity are the sort of vague, general statements that courts both within and outside this Circuit have found insufficient to support a fraud action, the Government's first "alleged scheme to defraud" fails.
Now, in response to my questions, the S&P spokesman made a series of arguments about the plaintiffs in the lawsuits in question. All of these points came down to the same idea: that these investors were big boys, and should have known better than to rely upon an S&P rating.
"Most of the plaintiffs were sophisticated institutional investors that did not actually rely on the ratings in making decisions," he wrote. These plaintiffs, he went on, were "large institutional investors with significant investment staffs of their own," and some of them, he pointed out, didn't cover themselves in glory with their background research.
One institutional investor, he wrote, "admitted that it did no more than look at the rating and the yield on a Bloomberg screen, spending no more than five minutes deciding to invest $50 million." All they did was look at our rating before investing! What idiots!
This is straight out of Animal House. It's the Wall Street version of, "You fucked up – you trusted us!"
I don't often get angered by the things press spokespeople say. Most of these people have difficult jobs and are often forced to be the public faces of policies they had nothing to do with creating.
But in this case, S&P just a few weeks before had sworn before a judge that its reassurances about objectivity, integrity and independence were not legally binding, vague, and so generalized as to be essentially meaningless.
Yet when I contacted this company, they sent me exactly, and I mean exactly, the same reassurances about objectivity, integrity, and independence that they themselves had laughed at as "mere puffery," "vague," and "so generalized that a reasonable investor would not depend" on them.
Then they went on to deride the plaintiffs in their lawsuit for not being smart enough to do their own research and make their own assessments about the meaning of an S&P rating, and the value of its reassurances of independence and integrity. Yet us reporters are apparently still expected to take such assurances at face value, which if my math is correct means that in their eyes, we must be even dumber than the investors in the products they rate. What a bunch of assholes!
Anyway, if you want the full lowdown on what actually goes on internally at these companies, check out the piece, which is full of the devastating material dug up by those San Diego lawyers.
Also, thanks so much to the excellent Chris Hayes at MSNBC, who had me on last night to discuss the issue. It was a very fun talk.