Ohio Sues Rating Firms for Losses in Funds: Fraud Catching Up with Swindlers

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WHY THIS IS IMPORTANT TO FORECLOSURE DEFENSE AND OFFENSE: OK I know the last thing you want to hear is how complex this scheme was. But if you can get over the intimidation factor, you will see how the lawsuits filed by individual homeowners, attorney generals, and class actions are picking apart the whole scheme, coming up with the inconvenient answers that Wall Street is working to avoid and that many government officials are too lazy or paid off or whatever to get involved.
So here we focus on the rating agencies and you might be asking why do I care if I wasn’t an investor who bought those empty bonds that funded my loan? The reason is that others with far greater resources than you are doing your work for you.
The SINGLE transaction, starting with the sale of the bond to the investor and then to the sale of the financial loan product to the homeowner and then ending with the false foreclosures and unconscionable proceeds of credit default swaps could ONLY have been achieved with the active participation from the rating agencies.
By selling their reputation for objectivity to the highest bidder, by misusing their skill in assessing credit risk,  the rating agencies enabled those bonds to be sold under the pretense that they were AAA sound investments. But for that the mortgage meltdown would never have occurred. But for that, you would not be in the upside down position, or delinquency, default or foreclosure in which you find yourself.
But for the free flow of free money there would have been no pressure to get rid of it in order to make Wall Street’s unconscionable profits. And without that pressure, housing prices would have remained relatively stable instead of shooting up to unprecedented (by any measure) unsustainable levels that were not reflective of what the homeowner would get when Wall Street’s scheme was over.
Your home loan was rated by these rating agencies. They looked the other way and changed underwriting standards from common sense to common fraud. The ONLY way the bonds sold to investors could have been rated so high was by rating the underlying mortgages and notes. No REAL analysis would have done anything except raise red flags bringing the rating down to junk. Just starting with the appraisal” on the house which was also a form of rating, no reasonable person could possible look at the history of housing prices and believe that the 30% jump in 4 months was sustainable. Nobody using their own money would fund a deal based on that. It is only because the originating “lenders” (i.e, straw-men, conduits) were not using their own capital that these loans were made.
We were all duped by the appraisers and the rating agencies who sold their integrity to the highest bidder. And in the process of tragedy of astonishing severity is unfolding, getting worse and fooling the American public — until it reaches each and every one of us, which it will.
At some point the homeowners should be suing the rating agencies and appraisers for their part in all this. The counterclaim is both fraud in the inducement and fraud in the execution. Fraud in the execution because you thought you were just taking out a loan when in fact you were purchasing a financial loan product that was a security promising you passive returns whose value was intentionally misrepresented. Fraud in the inducement because had you known the true value of the property you would never have assumed that you could cover the loan terms, which were also illegal and predatory.
The game is on. If you reach the truth before Goldman et al are done, you can stop it, reverse it, and set the country back on the path of confidence in an economy that is based upon something other than $500 trillion in derivative vapor.
November 21, 2009

Ohio Sues Rating Firms for Losses in Funds

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

“A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share,” he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption,” he said.

A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades.

One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that “wildly inaccurate ratings” had led to roughly $1 billion in losses.

And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining “how these agencies could get it so wrong and whether they violated California law in the process.”

As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998.

To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal “could be structured by cows and we’d rate it.”

Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say.

“If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and Lee University School of Law. “The First Amendment doesn’t extend to the deliberate manipulation of financial markets.”

The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities.

At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

“Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.”

To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk securities that both issuers and rating agencies knew to be little more than a house of cards,” the complaint states.

7 Responses

  1. […] Neil Garfield     Ohio Sues Rating Firms for Losses in Funds.   Originally posted Nov 21, 2009. Possibly related posts: (automatically generated)Ohio Sues Rating Firms for Losses in Funds: Fraud Catching Up with SwindlersEconomies of (Ratings) Scales, Part 1Budget monitors are a discredited bunch […]

  2. Then there were two – Connecticut steps up:

    Connecticut to Sue Rating Firms for ‘Reckless’ Work

    By Deirdre Bolton and Caroline Salas

    Nov. 25 (Bloomberg) — Connecticut plans to join Ohio in suing Standard & Poor’s, Moody’s Corp. and Fitch Ratings for their “negligent, reckless and incompetent work” in grading investments made by state pension funds, according to Attorney General Richard Blumenthal. …

    At http://www.bloomberg.com/apps/news?pid=20601087&sid=aDJuZul5EW6s&pos=3#

  3. Hi Neil I hope you are doing well.I am sure I love.

    There has been a question in my mind about the Credit Agency who does the Risk evaluation, Due Dillignece and compliance. I would love to know if there is anyone who could tell me what the results mean.

    I got a man on the phone beginning of the year I think, somewhere stounf that time. He told me to send it to him, once he received the papers, he well, he didn’t return the call, when I finally got him, he said the information was confidential, he has to maintain confifdentiality for the lender, He did not tell me who th elender was.There were 3 names on the cocument.

    It was performed on 3 different GFEs 8,8.37 and 11.47 % interest rate. They perfformed this 2 or 3 months after the Settlement. The coded results I don’t understand but they did find compliance issues. again the coded numbers I don’t understand.;

    Thanks! Neil I hope you are feelong well.
    Juli

    Oh PS, I do know that back in the winter of last year NY Attorney General was doing an investigation on them, they did not say they did antything on them specifically, but generally in this business.

    If the mari the survey to have due dilligence and it dies not pass

  4. My take on this is that the “too big to fails” have already failed and the system is in process of collapsing. It’s too late to fix it now. The horse is already outside the barn and the barn is on fire. There is too much unpayable debt that can’t be paid.

    The idea of dismantling too big to fail organizations is a good one, but the damage has already been done. The idea of not allowing “too big to fail” organizations is a good one. It will be good for future economic system models but at this point in time, its too late.

  5. Lynn Chase,

    Love that “Money Unlimited” letter! The Federal Reserve tells us that “Banks actually create money when they lend it,” so why didn’t they just “create” some more “money” and bail themselves out?

    Did you see my reply about the Fannie Mae Loan Lookup Tool on the other thread?

  6. House Amendment Allows Dismantling of ‘Too Big to Fail’ Firms
    By AUSTIN KILGORE
    November 20, 2009 2:48 PM CST
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    A House Financial Services Committee amendment that passed this week would empower federal regulators to dismantle financial firms considered “too big to fail.”

    The amendment, authored by House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises chair Paul Kanjorski (D-PA), was included to the Financial Stability Improvement Act with a vote of 38-29.

    The amendment would allow the dismantling of large firms whose collapse would put the US economy in risk, even if those firms appear to be well capitalized and healthy.

    “Today’s passage of my amendment marks a crucial step for the American people and for the protection of our financial system,” Kanjorski said in a statement. “I remember the dire situation we faced last fall, and we want to do everything we can to avoid such a situation in the future.”

    Kanjorski added: “Looking forward, we have the capabilities to try to act in a preventative manner for the sake of every American and our economy. Most of us yearn for the day when the phrase ‘too big to fail’ is no longer a part of our vocabulary. Through responsible action advocated in this amendment, we can make that a reality.”

    The Financial Services Oversight Council would have oversight of any dismantling and would be responsible for evaluating firms. The council could not dismantle a firm without first consulting with the president.

    In other actions, a measure that would call for the first-ever audit of the Federal Reserve monetary policy passed the committee. HR 1207, authored by Reps. Ron Paul (R-TX) and Alan Grayson (D-FL), passed by a vote of 43-26. It removes the blanket restrictions of Government Accountability Office (GAO) audits of the Fed, but retains limited audit exemption on unreleased transcripts and minutes. It also sets a 180-day time lag before details of Fed’s market actions may be released.

    “This is a major victory for Federal Reserve transparency and government accountability,” Paul said in a statement.

  7. An Open Letter to the Federal Reserve
    By Matt Koppenheffer and Morgan Housel
    November 20, 2009 | Comments (38)

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    Dear Ben Bernanke and distinguished members of the Federal Reserve:

    We are writing today to formally solicit your help in obtaining approvals to start a new bank holding company, Money Unlimited. We of course understand that the approval process for a new bank is typically done through the FDIC, but as the Federal Reserve plays a crucial role in our business plan, we hope that you can expedite the process.

    First, let us assure you that we will start from day one as a very well capitalized institution, with no need to raise outside capital. While actual cash is on the lower end of the spectrum, we both own stock portfolios that we plan to use as collateral for our banking operations. Our current holdings include Berkshire Hathaway (NYSE: BRK-B), Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), and Coca-Cola (NYSE: KO).

    For the purposes of this application, we are choosing to mark these assets to model rather than to market. Our basic assumptions include 7% U.S. GDP growth, 12% global GDP growth, a 4% U.S. unemployment rate, rising corporate profitability, U.S. debt repudiation, and the end of cloudy days.

    In addition, Matt owns a home in Las Vegas. Though this asset is currently considered “under water” based on market valuations, a house down the street just sold for slightly more than Zillow.com said it was worth. We extrapolated that gain into infinity and determined the housing bust is simply a figment of the media’s imagination.

    Now the good news: Without getting into the complexities, our models show our combined net worths at just over $1 billion, all of which we’ll use as capital for Money Unlimited. We hired a 22-year-old right out of college who’s pretty darn good with Excel. He assures us it’s a conservative figure.

    While neither of us has any “formal” banking experience, our time-tested business model more than compensates for this apparent shortfall. As with Goldman Sachs (NYSE: GS), which was recently made a bank holding company, we have no plans to engage in actual banking operations such as deposit-taking and lending. That stuff just sounds hard. Regulators are always all, “You need to lend money to people who can pay you back.” We’d rather just avoid that whole sticky situation altogether.

    Instead, we’re going to leverage our borrowings from the Federal Reserve to create a massive, money-spewing trading operation.

    It’s quite simple, really. We’re going to borrow money from the Federal Reserve at 0%, then lend it back out to the U.S. Treasury at 3%. The Treasury can then use that money for fantastic programs like Cash for Clunkers. If we leverage our $1 billion asset base 20-to-1, we’ll pull in $600 million in year one without breaking a sweat.

    Because we want to do what’s right for the economy, we plan to keep operating expenses to a bare minimum and limit our bonuses to $20 million each for the first five years. By plowing the remaining money back into the bank — and, of course, leveraging it at 20-times — we’ll be able to grow like a weed. Assuming you folks at the Federal Reserve continue to do your part by lending money at 0%, we expect to clear $120 billion in assets in five years flat.

    And don’t worry about us. We understand that hard work and tangible economic contributions need to be rewarded, so in the sixth year of operation we both plan to take $500 million bonuses and use company money to buy ourselves private jets.

    Money Unlimited will offer other significant benefits to the economy as well. We’ll compete against banking organizations such as Goldman Sachs, JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C), who are no doubt engaging in similar practices. (Have you seen their earnings?) Plus, we’ll allow other banks to buy credit defaults swaps against us. As any financial professional worth his salt can tell you, this “increases liquidity” and helps small businesses. We can’t tell you exactly how that works, but salesmen who wear shiny cuff links and talk really fast tell us it’s true.

    But helping the economy isn’t all we’re about. As Goldman Sachs’ CEO Lloyd Blankfein recently put it, this is “God’s work,” and we certainly don’t disagree with that.

    Before long, the founders of Money Unlimited expect our trading operations will become so large that we will be considered “too big to fail.” While some may consider this a concern, we disagree. There should be more competition among “too big to fail” institutions so that the risk of a Chernobyl-type catastrophe in our financial system is spread more broadly.

    Thank you for your time and we look forward to your help obtaining a speedy approval for Money Unlimited.

    Sincerely,
    Matt Koppenheffer and Morgan Housel

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