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Edwynn -> RE: S & P "negligent" Australian Court rules (11/6/2012 5:24:14 PM)
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quote:
They were all too willing to accept the bogus claims of Wall Street at face value.
If that's a far as it went, it's unlikely the Australian court would have found as they did.
I'm sure they were well familiar with the Levin Report; (from this site)
In Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, April 13, 2011, pp. 45-46 [hereinafter, the Levin Report.”], the Congressional staff concluded that:
...
“The evidence shows that analysts within Moody’s and S&P were aware of the increasing risks in the mortgage market in the years leading up to the financial crisis, including higher risk mortgage products, increasingly lax lending standards, poor quality loans, unsustainable housing prices, and increasing mortgage fraud. Yet for years, neither credit rating agency heeded warnings – even their own – about the need to adjust their processes to accurately reflect the increasing credit risk. Moody’s and S&P began issuing public warnings about problems in the mortgage market as early as 2003, yet continued to issue inflated ratings for RMBS and CDO securities before abruptly reversing course in July 2007.” [Emphasis added.]
There is also this;
"At Moody’s the CPDO model – as with most structured product models – came in two parts: the dll and the CDOROM. The dll was the “black box” proprietary part: the secret mathematical model developed to spit out the rating.
The “error” in Moody’s code, which a Financial Times investigation revealed on Wednesday, was in the dll.
When Moody’s discovered the error they corrected it and found that this meant that standard “ABN-like” first generation CPDOs would lose up to four notches of their ratings. (Whoah!!! that's from AAA to BB!! the highest rating of junk!! [parenthetical note of freaked-out emphasis, Ed].) CPDOs rated after the correction, however, still achieved triple A.
In part, it seems this was because Moody’s made two simultaneous changes to their rating methodologies. These reduced the impact of the coding issue, say documents seen by the FT.
The changes reflected different methodological assumptions about the market. Most notably, the first change put a “volatility cap” onto Moody’s predictions for how the CDS markets would behave. This had the effect of discounting any scenarios spat out by the model which predicting large movements in price: in effect, the model was adjusted so it couldn’t predict the credit crisis."
In any case, I'm glad the attorneys for the NSW councils went for the negligence aspect. Heretofore, the agencies claimed that their ratings were only opinion, not guarantees or statement of fact, so then no fraud. Thankfully, a suit can still be brought for damages due to ineptitude.
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