
U.S. to sue S&P over ratings ahead of financial crisis - anigbrowl
http://www.reuters.com/article/2013/02/04/mcgrawhill-sandp-civilcharges-idUSL1N0B495Q20130204
======
dxbydt
The DoJ lawsuit is over S&P's ratings model for CDOs & CLOs. Portfolio loss
distributions are computed using expected loss distributions constructed with
historical asset correlations, via large MC simulations. Each ratings agency
uses different metrics - moody's using the GCorr ( global correlation matrix),
S&P uses creditpro etc, which changes the rating transitions. There's no
foolproof way to do this - its a very seat-of-the-pants applied multivariate
stats problem, where "bad inputs" skew the SDR ( scenario default rate ) which
then drives the ultimate cdo rating. When you have 7 tranches on average & you
have considerable discretion over what your put into each tranche, you can
essentially "buy" a rating.

Most of the money that went all-in was pension funds. So in a very real
perverse way, the public was entirely responsible for this mess. The public
bids up house prices - this skews up the asset correlations of the CDO models.
The house prices keep going up, & the public parks its profits & savings in
pension funds. The pension funds then buy up the very CDOs! You have a nice
positive feedback loop that eventually collapses on itself.

Here's a good primer we used back in school ( <http://bit.ly/14AHP5q> ). start
on page 13.

~~~
haberman
It's perverse to blame the public for bad financial models created by ratings
agencies whose sole professional responsibility is to accurately model risk.
"But the public caused an asset bubble we didn't anticipate" sounds like the
Wall Street Banker version of "my dog ate my homework." Adjusting the models
when they produce incorrect answers is their _job_.

~~~
dxbydt
> bad financial models created by ratings agencies

Impersonal words like "ratings agency" actually consists of a bunch of really
smart math, stat & physics phds ( & the occasional finance phd who didn't get
into the buyside IBs & hedgefunds :) The ratings are spit out by models. The
models ar driven by simulations upon giant matrices whose input is historical
correlations. When the inputs fuck up, the outputs will get hosed too.

> Adjusting the models when they produce incorrect answers

Nobody adjusted the models when they produced incorrect answers because the
answers weren't incorrect. They weren't the answers you like _in hindsight_ ,
but they were correct insofar as the model was vetted & the input was correct.

Lemme give you a crazy, absolute bizarre scenario. Lets say there is massive
acceptance of sexting pics among US youth starting tomorrow. Youtube is
flooded with penises & vaginas. Then the churches start filing lawsuits
against google because youtube is actively promoting pornography. You see what
I'm getting at. For youtube to be relevant, it has to cater to the youth & not
actively censor content especially stuff that has mainstream acceptance among
youth. At the same time, it becomes liable. Rock & hard place. This is the
exact sort of crazy bizarre stuff that happened during the financial crisis.
The models are predictive, not normative. House prices actually went up, year
after year, & the cdo ratings simply reflected that. Then people got burnt &
are deciding the models are responsible! If the models priced normatively, the
investors would simply look elsewhere for different models that priced
predictively.

~~~
joe_the_user
_Lemme give you a crazy, absolute bizarre scenario. Lets say there is massive
acceptance of sexting pics among US youth starting tomorrow. Youtube is
flooded with penises & vaginas. Then the churches start filing lawsuits
against google because youtube is actively promoting pornography. You see what
I'm getting at. For youtube to be relevant, it has to cater to the youth & not
actively censor content especially stuff that has mainstream acceptance among
youth_

Yeah, that's pretty crazy and actually self-serving and disingenuous. If
ratings labelled themselves "free-expression platforms for Math PhD's who
don't guarantee nothin' but garbage-in, garbage-out" well then they'd have no
obligation beyond that of youtube. But they signed up, actually put pen-to-
paper and _got money_ , for the responsibility of being "the adult in the
room". You seem to think that their failure to actually _be that_ is just a
terribly unfortunate coincidence that they should have no responsibility for,
despite their claiming that it earlier.

------
richardjordan
No-one will go to jail.

I sometimes struggle to figure out why the political system is such a mess in
the US, being a recent citizen, coming from another country and system.
Disengagement is obviously a huge factor, as it gives extremists
disproportionate influence. Corruption is another, directly, as in directly
steering policy in directions contrary to the directly stated will of the
people in their voting.

However corruption has a nefarious influence on the first factor -
disengagement. When the average joe on the street lives in a world where laws
are almost arbitrarily vague and enable arrest and detention on a whole host
of grounds - for example, relevant to this community, the hounding do death of
folks like Aaron Swartz, but most communities have ehtir own examples - and
where jobs are being lost and real hardship is experienced by large
percentages of the country... it is not surprising that when we see these huge
crimes, terrible consequences on the common man from dramatic misbehavior
among the wealth elites who remain largely unscathed suffering few
consequences of their actions... and when we see the wealthy and connected
elites absolutely immune to legal recourse - no jailtime, nothing more than
slaps on wrists, on companies forced to shut up shop... is it really
surprising so many people just give up?

~~~
pekk
People usually don't go to jail as a result of civil suits.

What did you expect, the cultural revolution?

~~~
richardjordan
Indeed.

I suppose it's the broader point that concerns me, and that I was really
focused - the fact is that the tanking of the economy based on fraud and
negligence resulted in no jailtime. I feel, and folks may think I'm wrong in
this, that this is very visible to ordinary men and women in America and has a
corrosive effect on the nation and its body politic.

~~~
_delirium
I understand the sentiment, but I'm personally skeptical that jailtime in
particular is the solution. I also have the same instinctive reaction to "we
jail people for X, but not [worse Y]?!", but I think in many of those cases,
when I think about it more, I'd rather jail fewer people to equalize that,
rather than more.

And when it comes to tanking the economy, I'd like to figure out how it
happened and put systemic reforms in place, more than I really want specific
heads to roll. There are some well-run countries that don't tolerate
corruption that _don't_ jail people very often— they just see to it that
anyone corrupt is shown the door. If you can do that consistently, it hardly
matters if you show them the door into jail or a quiet retirement. I.e.
keeping a hold on the situation directly, rather than trying to deter
malfeasance with jail time.

~~~
richardjordan
My instinct is to reduce people in jail too. The land of the free shouldn't be
so dramatically worse in terms of incarceration rates than ALL other countries
in the world. That's messed up.

That being said there are zero consequences of impact to disincentivize
widespread corruption and illegality in the financial sector, and that is the
biggest systematic failing. So long as you can make $100MM screwing people
over, then retire with it all when you get caught, and effectively zero chance
of any sanction even if your actions were criminal, people will take that bet
every time.

------
Alex3917
Looks like Biden is pissed about the US debt getting downgraded.

~~~
hollerith
Oops: accidentally downvoted you when I wanted to upvote.

------
jbuzbee
Isn't the S&P rating just an opinion? If I created a subscription-based
restaurant newsletter that you relied on and subsequently got food poisoning,
would you sue me or just cancel your subscription and tell all your friends
that my ratings were garbage?

~~~
mdda
Many banking and insurance regulation are based on the ratings of the
securities held : So being a Nationally Recognized Rating Agency is a pretty
critical role, and a ratings agency deserves to be held to a higher standard,
IMHO. OTOH, perhaps the government should subsidize them, since they are
performing work for the governments regulators, in effect.

~~~
Agathos
They are essentially a government agency with a profit motive. This worked out
as well as any reasonable person would have anticipated. The strange thing is,
the government still hasn't stripped them of their quasi-regulatory powers.

------
revelation
It seems thats how our law system works today: purely quid pro quo. Knowingly
give too good ratings to a bunch of toxic mortgages? Who cares. Give the
government a bad rating? We're coming for you!

------
benmccann
Ratings are silly. It's a huge systemic problem to rely on them so much. If
everyone made their own decisions then some would be right and some would be
wrong, but we'd end up with market prices. When everyone uses the same model
then everyone is in trouble when the model fails.

------
brettbowman
Not only have the loans been repaid, but TARP was unfortunately a necessary
evil. I'm certainly against socializing banks, but in this case we had few
alternatives. A great book on this is "On The Brink" by Henry Paulson (former
Treasury Secretary).

~~~
mitchdumke
I haven't read the book but I worked in DC during bailout and sat in on the
Senate hearings with all three of these rating agencies. I tell ya, Hank
Paulson was much more confident during the meltdown than the head of each
agency. I'm not surprised these guys are under the gun, they've playing stupid
and deserve this suit.

------
Tycho
Arthur Anderson collapsed after Enron catastrophically cooked the books on
their watch. An entire industry cooked the books on the 3 major ratings
agencies watch, yet they are all still in business.

Why?

------
dxbydt
_very nice_ buying op on mco. i'd sell the 50$ feb 15 puts & load up on the
55$ otm calls.

~~~
dxbydt
dear wise downvoters, do you downvote on pure reflex ? did you bother reading
the article ? can you venture a guess why mco ( not s&p but mco ) fell ? in
the very high likelihood that mco ( again, not s&p, but mco) bounces back
tomorrow, isn't this a nice buying op ? moody's has not been in lockstep with
s&p w.r.t cdo ratings.

~~~
logn
I think they downvoted because they're hackers reading this who have no idea
about what you wrote and downvoted much like the high school bully punching
you for saying something nerdy. Please, in the future just complain about
gov't injustice: much better for karma.

~~~
gnosis
I downvoted because I have no interest in seeing stock trading tips on HN.
This is not a stock trading forum, and those kinds of comments don't belong
here.

~~~
jlarocco
In all fairness, the article itself doesn't have much business being on HN,
either. It seems a little unfair to click through to the comments on an off-
topic article and then down vote the comments for also being off-topic.

~~~
anigbrowl
A reasonable observation. I posted it here because it (IMHO) points to a
systematic problem in the operation of markets - a flaw in our economic
operating software, as it were.

------
nirvana
Can I sue politicians for lying? Why is it that this is only a one way street?

Hell, frankly, I think that heads should roll for the bailout. It is not
authorized under the constitution, and it is the largest financial heist in
history.

A bunch of politicians can simply steal american money and give it to banks,
and get away with it? Really? And people are upset, but they blame the banks
only?

And then forgive the "debt" they created and pretend like it was "paid back".

It's still going on too.

Right now, every month, they are handing out $40B a month buying "distressed
assets".

You know how to get rich? Be well connected, make a loan to someone who then
turns around and defaults (he got the loan money, so he's well paid) then get
the politicians to write you a check!

There's no oversight now, the Federal Reserve-- a private bank owned by
Goldman Sachs, JP Morgan, probably Rothchild family, et. al. is the one
spending the money. No legislation is needed to make it legal.

It's stealing more money every month than all the organized crime has stolen
in this countries entire history!

And it's not even worth a mention in the local papers.

That's messed up!

~~~
gnosis
_"And then forgive the "debt" they created and pretend like it was "paid
back"."_

Could you substantiate this claim?

I'm genuinely interested. I was under the impression that the overwhelming
majority of the bailout money was paid back. I'd read in reputable newspapers
that this was the case. If it was "forgiven" instead, I'd be very interested
to see the proof.

~~~
sxcurry
I believe you are correct - most of the bailout money has been repaid:

As of December 31, 2012, the Treasury had received over $405 billion in total
cash back on TARP investments, equaling nearly 97 percent of the $418 billion
disbursed under the program. [Wikipedia]

