The S&P story just keeps getting better


The Standard & Poor’s story just keeps on giving. Just when you think it’s about to wind down, there are more twists and turns to be reported.

Here’s the Wall Street Journal story from Jeannette Neumann:

As ammunition against Standard & Poor’s Ratings Services, the Justice Department packed its fraud lawsuit with vivid details about more than 25 employees who allegedly put triple-A ratings on shaky bundles of subprime mortgages—or dithered on downgrading the securities as the housing market was collapsing.

David Tesher, an S&P managing director in charge of one of the firm’s two collateralized-debt-obligation groups, let analysts who reported to him put the highest possible ratings on deals S&P “knew did not accurately reflect the true credit risks,” the U.S. government alleged in the suit filed Feb. 4.

When a different group of analysts warned that more and more borrowers were falling behind on their payments, Mr. Tesher didn’t tell his analysts, federal prosecutors claim. They put his name in the 128-page lawsuit a total of 59 times.

Mr. Tesher, who couldn’t be reached for comment, now is a managing director in the part of S&P that analyzes the ability of companies to repay their debts.

The Justice Department identified five S&P executives, including Mr. Tesher, in the lawsuit, as it seeks to make S&P, a unit of McGraw-Hill Cos. pay more than $5 billion for giving its seal of approval from 2004 to 2007 on deals that caused steep losses at federally insured banks and credit unions that bought securities rated by the firm.

Yep, that’s right. The guy named nearly 60 times in a lawsuit now works in the division that rates companies for safety and soundness. And there’s more.

The suit also refers to 17 unnamed employees, ranging from “Senior Executive A” to “Analyst F.” There also are several people referred to simply as “analysts.” One of them, Shannon Mooney, wrote in a 2007 instant message to another analyst that a CDO “could be structured by cows and we would rate it.”

The “cows” message appears in both the lawsuit and in a 2011 Senate report about the financial crisis in which Senate investigators identify Ms. Mooney as the sender.

Ms. Mooney now rates different kinds of structured-finance deals, and her name appears on recent S&P research reports. She couldn’t be reached for comment.

An S&P spokesman wouldn’t confirm or deny specifics, saying the firm doesn’t publicly discuss personnel matters.

The spokesman reiterated S&P’s previous denial of the government’s allegations. S&P has said prosecutors “cherry picked” emails and other documents, while ignoring millions of records that counter the accusations.

“Cherry picked” or not, it still doesn’t look great for the agency. It also brings up questions about why the rating agencies are around and why people continue to rely on their opinions. Here’s more:

Of the more than 25 employees included in the U.S.’s lawsuit, at least 10 remain at S&P, though their duties have changed since the financial crisis.

The Wall Street Journal determined their identities and job status by reviewing S&P research reports, court filings and the Senate report, and through interviews with former and current employees.

No individuals have been named as defendants by federal prosecutors or 16 state attorneys general who have filed suits against S&P. In other crisis-related lawsuits, regulators seldom have brought charges against executives or other employees at companies accused of wrongdoing.

S&P says it has spent about $400 million since 2007 to strengthen compliance, train analysts and revamp its rating standards. Those moves have made it harder for bond issuers to get triple-A ratings from S&P, the spokesman added.

“We have taken to heart the lessons learned from the financial crisis and made extensive changes that reinforce the integrity, independence and performance of our ratings,” S&P President Doug Peterson told analysts and investors earlier this month. He took over as S&P’s top executive in September 2011.

It might be harder for companies to get the highest rating, but apparently it’s not that hard to keep your job at S&P. This story is an excellent piece of journalism. It also continues to call into question the level of trust people should put into their work.