The government's case against Standard & Poor's points to documents that authorities say support their accusations — namely, that S&P intentionally gave high marks to risky mortgage investments that eventually collapsed and helped trigger the financial crisis.
S&P disputes the allegations. It says the emails have been taken out of context and don't prove any wrongdoing.
Here are some examples of the government's evidence:
— In April 2004, S&P executives circulated a draft proposal for changing the way it rates investments. The new rating system would consider the potential investor reaction — "market insight," in financial parlance. Under this proposed system, S&P's analysts would survey bankers who planned to issue the security and investors who might buy it.
One S&P executive protested in an email: "What do you mean by 'market insight' with regard to a proposed criteria change? What does 'rating implication' have to do with the search for truth? Are you implying that we might actually reject or stifle 'superior analytics' for market considerations? ... Does this mean we are to review our proposed criteria changes with investors, issuers and investment bankers? ... (W)e NEVER poll them as to content or acceptability!"
The executive's concerns were ignored, the government said. The S&P contends that under "certain recent regulations," it's required to discuss proposed ratings criteria with market participants.
— A July 2004 memo told employees that any "concerns with the objectivity, integrity, or validity" of the ratings process should be expressed in person, not in writing. "If it is not practical to speak with the person, only then should these concerns be expressed in an email or written memorandum."
— In August 2004, one executive expressed concern that S&P would lose business to competitors like Moody's and Fitch unless it gave more favorable ratings to investments. "We are meeting with your group this week to discuss adjusting criteria for rating CDOs (a type of investment) of real estate assets this week because of the ongoing threat of losing deals."
— The lawsuit says S&P considered tightening its criteria for rating some investments, then balked after banks like Bear Stearns protested. The government says S&P was more concerned with generating revenue than with producing accurate ratings.
In June 2005, one analyst wrote of the ratings criteria: "If we are just going to make it up in order to rate deals, then quants are of precious little value," referring to "quantitative analysts" who analyzed risk.
— In March 2007, one analyst wrote an ode to the subprime mortgage meltdown, emailing colleagues with a takeoff on the song "Burning Down the House" by The Talking Heads.
"Watch out/Housing market went softer/Cooling down/Strong market is now much weaker/Subprime is boi-ling o-ver/Bringing down the house," he wrote.
A few days later, the analyst sent a video of himself singing and dancing that verse in S&P offices, with colleagues laughing.
— In April 2007, two S&P analysts spoke via instant message about how they didn't think S&P's ratings model for some investments accurately estimated the risks.
Analyst 1: btw that deal is ridiculous
Analyst 2: I know right ... model def does not capture half of the ... risk
Analyst 1: We should not be rating it
Analyst 2: we rate every deal .... it could be structured by cows and we would rate it
Analyst 1: but there's a lot of risk associated with it - I personally don't feel comfy signing off as a committee member
The S&P says this analyst had her concerns addressed with the issuer before S&P issued any rating.
—In July 2007, an S&P analyst and an investment banker discussed the payment structure for ratings agencies like S&P, which are paid by the same banks whose investments they're rating.
S&P analyst: "The fact is, there was a lot of internal pressure in S&P to downgrade lots of deals earlier on before this thing started blowing up. But the leadership was concerned of p(asterisk)ssing off too many clients and jumping the gun ahead of Fitch and Moody's."
Investment banker: "This might shake out a completely different way of doing biz in the industry. I mean come on, we pay you to rate our deals, and the better the rating the more money we make?!?! Whats up with that? How are you possibly supposed to be impartial????"