Standard & Poor’s employees joked about the company’s willingness to rate deals “structured by cows” and sang and danced to a mock song inspired by “Burning Down the House” before the 2008 global financial collapse, according to a U.S. government lawsuit.
Two S&P analysts in April 2007 discussed the company’s model for collateralized debt obligations, with one messaging that a deal was “ridiculous” and that S&P “should not be rating it,” according to the complaint filed Monday in federal court in Los Angeles.
“We rate every deal,” the other replied, prosecutors said. “It could be structured by cows, and we would rate it.”
The analysts’ messages are among internal communications cited in the Justice Department’s complaint against S&P and its parent, New York-based McGraw-Hill Cos.
The U.S. claims S&P, driven by a desire to increase revenue and market share, defrauded investors as it issued ratings on mortgage products while ignoring market risks. It rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 to October 2007, the government said.
A 2008 investigation into credit rating companies by the Securities and Exchange Commission found that that the firms improperly managed conflicts and weighed the risk of losing market share based on their ratings.
The report on Moody’s Investors Service, S&P and Fitch Ratings cited the discussion about the deal structured by “cows” and quoted an analyst who wrote in an e-mail: “Let’s hope we are all wealthy and retired by the time this house of cards falters.”
According to the U.S. lawsuit, S&P in 2004 was considering a process for changing its rating criteria and reached out to investors and issuers of mortgage securities for their feedback.
Employees at the time were raising concerns about losing deals to competitors, according to the complaint. One analyst in May 2004 wrote that the company was losing a “huge” deal to a competitor because S&P was more conservative than others, the government said.
“This is so significant that it could have an impact on future deals,” the analyst wrote, according to the complaint. “There’s no way we can get back on this one, but we need to address this now in preparation for future deals.”
In 2007, one analyst wrote to a former co-worker: “Does company care about deal volume or sound credit standards?”
E-mails and text messages can give prosecutors insight into the “unvarnished perspective” of company insiders and help them win trials because they’re easier for jurors to understand than more formal documents, said Robert Mintz, a partner at McCarter & English.
“They tend to give jurors a flavor for the general atmosphere inside a company, and that in connection with other documents can often be quite damning,” said Mintz, a former federal prosecutor in New Jersey.
S&P said in a statement that the government’s lawsuit is “meritless” and that at all times the company’s ratings “reflected our current best judgments” about mortgage securities and collateralized-debt obligations.
“Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected,” the company said.
The reference to a deal “structured by cows” had “nothing to do with RMBS or CDO ratings or any S&P model,” it said, contradicting the complaint. RMBS stands for residential mortgage-backed securities.
“The e-mail excerpts cherry-picked by DOJ have been taken out of context, are contradicted by other evidence, and do not reflect our culture, integrity or how we do business,” it said.