S&P Investigation Tagged With Codename ‘Alchemy’
At the press conference announcing the Justice Department’s lawsuit against S&P, Acting Associate Attorney General Tony West said in a speech
that by March 2007, S&P knew that mortgage-backed securities were in such deep trouble that unprecedented downgrades were inevitable; it wasn’t a matter of “if,” but “when.” West noted that such downgrades meant that the value of subprime mortgage bonds on the books of some of S&P’s most significant bank clients would be dramatically reduced.
West said S&P’s business executives rejected these downgrade recommendations, choosing instead to continue rating subprime mortgage bonds for their bank clients, whose appetite for highly-rated, mortgage-backed securities was growing.
“So to avoid the significant financial hit such downgrades would have caused, these banks packaged those subprime mortgage bonds into CDOs and sold them to investors as a way to get those bonds off of their books. And we have evidence that S&P not only knew this is what the banks were doing; S&P helped them to do it,” West explained.
The government is alleging that from at least 2004 to 2007, S&P lied about its objectivity and independence – that they said one thing yet did another. The evidence reveals that S&P promised investors and the public that their ratings were based on data and analytical models reflecting the company’s true credit judgment, when in fact internal S&P documents make clear that the company regularly would “tweak,” “bend,” delay updating or otherwise adjust its ratings models to suit the company’s business needs.
In his summary, West said the Justice Department’s codename for the investigation was “Alchemy.” Centuries ago, medieval alchemists tried various methods to turn lead into gold. Here, we allege that S&P’s desire to ensure market share, revenue and profits led it on a misguided venture to take securities it knew were lead and to tell the world through its ratings that they were gold. And in so doing, we believe S&P played a significant role in helping to bring our economy to the brink of collapse.
To read Tony West’s speech, click here.