S&P Lawsuit: A Vendetta or Just Another Phase in the Process

Since the filing of the US Department of Justice’s $5Billion lawsuit against Standard and  Poor’s there has  been much speculation as to the motivation for the suit by the DOJ; whether S&P is being unfairly singled out among the many other potentially culpable parties and whether it is possible that the Feds are after S&P in retaliation for the Agency’s downgrade of the US Government in 2011.

We don’t see of these conspiracy theories adding up, at least within the prism of trying to understand the DOJ’s motivations.

Anyone that followed the structured finance industry through the credit crisis knows that somewhere along the line the major rating agencies (S&P, Moody”s and Fitch) fell off the wagon and began assigning high ratings to suspect structures.  The rating agencies themselves have admitted this failure.   It should, therefore,  not surprise anyone that at some point in the process of sorting of out blame and responsibility that the rating agencies would be sued.  Surely, the bank originators, servicers, investment banks and the insurance providers have all had their turn in the ring over the last few years.  It was only a matter of time before the rating agencies were dragged into the process.

For those that find it more than coincidental that S&P was sued and not Moody’s or Fitch, we would remind them that S&P does command some 40% market share (as does Moody’s) with Fitch somewhere in the 15% range.  Add that the DOJ investigation of S&P, dates back to the early months of 2009 and it seems like a stretch to conclude that S&P’s downgrade of  US credit had much if anything to do with the process.

We think it is also important to keep in mind that the lawsuit is not some wild goose chase to simply lay blame at the feet of S&P.  At its base, the action is an attempt to recover some $5Billion in losses incurred by government “investors”.  In this respect, the fiduciary responsibility of the DOJ to attempt to help its investors recover what they can is hard to challenge.

This all doesn’t mean that the DOJ will be successful, as we believe that there are any number of good arguments that could prove that S&P was not responsible for the investment decisions of these governmental  investors.

Nevertheless, it is not a huge leap to suggest that the three major Read more of this post