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Standard & Poors: Pushing up daises thru AOFM's $15b RMBS "investment"

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Standard & Poors [cohorts] until this weeks Australian court decision sat comfortably behind the [purported] protected free speech under the first amendment to the US constitution, spuriously asserting that investors could not rely on the credit ratings issued by the 'agencies' as they were only "opinions" and not "financial advice" and there was no contract between the investor and the credit agency. But this is not the Americas and any abused first amendment "shield" is not a US product import 'down-under', otherwise granting impunity to credit agency's misdeeds operating within strained US jurisdiction.
Events must now compel the AOFM to immediately "REVIEW" all RMBS purchases completed under the umbrella of the credit agency's imprimatur, purporting AAA status, as their "stamp of approval" is not worth the paper it's written on, the RMBS related 'paper', bought site unseen relying on contrived 'face values', ongoing since 2008 on behalf of Australian Taxpayers (inc) --as they must be deemed 'unsafe' securities.

The tide turns for ratings agencies

Published 5:52 PM, 5 Nov 2012

In what’s been hailed as a world first, Justice Jayne Jagot ruled against Standard & Poor’s and ABN Amro in a case brought against them by 13 councils that had bought what proved to be a particularly exotic and toxic form of collateralised debt obligation created and marketed by ABN Amro and rated AAA by S&P. 

Litigation financier IMF has claimed the judgment, which S&P has already said it will appeal, is the first time anywhere in the world that a judge in a superior court had found a ratings agency guilty of negligent conduct in assigning a rating and could therefore pave the way for similar cases elsewhere. Indeed IMF says it is developing similar claims against S&P and ABN Amro in Europe, where it believes they sold about $2.5 billion of the particular securities involved in the Australian case.

While the case related to a particular type of derivative (constant proportion debt obligations, or CPDOs) in concept it was similar to the trillions of dollars of CDOs rated AAA by ratings agencies that subsequently turned out to be near-worthless.

US Senate committee hearings into the role of the ratings agencies after the crisis heard evidence from former employees of the big agencies that their senior management had become fixated with profits and market shares and the volume of ratings their firms were conducting rather than the performance of the securities rated.

With the issuer-pays model the agencies use there is a fundamental conflict within the business models of for-profit entities – their incentive is to win business and market share, satisfy their immediate clients and grow the pool of rateable securities rather than the performance of the credits they have rated.

In the US before the crisis there was a massive fee pool generated by the markets for securitised sub-prime debt, which the investment bankers structured and distributed and the ratings agencies rated. 

There was a significant commercial benefit for both the banks and the agencies in transforming sub-prime credits into AAA-rated paper. In some instances, according to the US inquiries, agencies actually helped design and develop structured finance products that they then rated.

In today’s judgment Justice Jagot found S&P’s rating of the CPDOs as AAA was misleading and deceptive.

The AAA rating conveyed a representation that in S&P’s opinion the capacity of the notes to meet all financial obligations was extremely strong and a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care ‘’when neither was true and S&P also knew not to be true at the time made,’’ the judge found.

ABN Amro had been knowingly concerned in S&P’s contraventions of various statutes proscribing such misleading and deceptive conduct and had itself engaged in misleading and deceptive conduct and published statements that contained material information that was false.

There have been attempts to introduce stronger regulation of the credit rating agencies post-crisis but progress has been extraordinarily slow with the US Securities and Exchange Commission finally establishing an office to oversee the agencies a few months ago. 

The fact that the ratings agencies’ "opinions" have Fifth Amendment protections in the US has complicated matters and in those jurisdictions, like Australia, where legislators have increased their exposure to litigation they have responded by stopping disclosure of their ratings to retail investors to limit that liability.

The US SEC reforms are light-handed and disclosure-based, with better reporting of their internal controls, separation of their sales and marketing functions from their ratings processes, better disclosure of the basis of material changes to their methodologies and the reporting of individual ratings histories.

The agencies themselves have become more aggressive in their approach to ratings (their treatment of European sovereign debt has had the Europeans frothing and threatening their own forms of heavy-handed regulation) but the conflicts and incentives built into their models and the role the three big agencies (S&P, Moody’s and Fitch) play within the global financial system means that trusting them to voluntarily maintain the independence and integrity of their ratings processes is laden with risk.

The problem for legislators, of course, is that the agencies do play a necessary role in global markets, or at least a role that the participants in those markets regard as essential. They can’t be regulated out of existence and represent a powerful force of their own.

That’s why today’s judgment, if upheld on appeal, is potentially very significant.

If the agencies’ Fifth Amendment shield provides them with some protections against angry investors, the prospect of litigation from non-US investors might create more intimidating disciplines than legislators and regulators appear able to impose.

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Contribute to the Conversation

Ben O'Grady wrote:

Perhaps Labor can insist on plain packaging and a wealth warning with graphic photos of impoverished investors, crying at the mortgagee sale of their homes, their children thrown out of school for non-payment of fees and all of them in tattered clothes, scounging through bins for scaps of food to eat? I'm not kidding!! But wait! Is Labor interested in watching out for those who work hard, save and invest? (The tide turns for ratings agencies, November 5)

5 Nov 2012 11:15 PM

Michael Russell wrote:

Bill Shorten has been very focussed on removing commissions from financial advice (The tide turns for ratings agencies, November 6).

Yet one the other hand he has not even been talking about removing conflicted remuneration from ratings agencies??!

It seems that he has been going after the little guy and leaving the big fish alone.

I am sure he has his reasons. Maybe Business Spectator could find out what they are?

6 Nov 2012 10:00 AM

Shawn Jewell wrote:

On Banksia Financial's Website there is still a PDF for S&P giving Banksia an "Above Average" rating for it's "Robust Business Model" and "Loan servicing Standards". (The tide turns for ratings agencies, November 5) However the Loans in arrears chart started climbing markedly after the GFC.

6 Nov 2012 1:36 PM

Alison Burke wrote:

well written Michael the hypocrisy of Shorten and others in the financial services industry is ridiculous. (The tide turns for ratings agencies, November 5) What is the point/value of ratings if they get paid for comment. The system stinks. About time these guys were held to account.

6 Nov 2012 1:38 PM

Des Fleay wrote:

Hmm Mike, any excuse for a bash. (The tide turns for ratings agencies, November 5) Rating Agencies are largely US based, we have little or no control over them, this courts decision might be a turning corner. Can any one imagine a large hedge funding secretly saying to a rating agency, down grade this or upgrade that, and we are on a winner and then they give them a secret sling, via a higher bill next time. Probably already has happened numerous times.

6 Nov 2012 1:39 PM

Bruce Smith wrote:

The way that the ratings agencies operate is unethical. (The tide turns for ratings agencies, November 6)

As a small private company, if we refuse to disclose our financials to them they default us to the lowest category.

This is just blatant coercion and needs to be stopped.

There is no need for a small private company to bend to their demands but, by not doing so, we were almost rejected by a EU supplier due the the "adverse" appearance of our report.

In the end we had that potential supplier sign a NDA and sent them our P&L and Balance Sheet and received acceptance the following day.

Based upon a credit report, another overseas supplier was advised that we were only good for a sum of US$100,000.00. However, based upon our payment record, that same supplier gave us US$300K credit - on open account.

These ratings companies are just fiscal bully-boys and seem to act with impunity.

You write to them and - in most cases - you are ignored.

Time for a very detailed review as to how they operate!

Time for a change!

6 Nov 2012 1:39 PM

xxxx yyyy wrote:

With their track record, I dont think the rating agencies have any relevance any more. (The tide turns for ratings agencies, November 5) If I am a fund manager, I wouldnt be making an investment deicsion based on the assesment of these rating agencies. Indeed thas exactly what happend to US govt bond prices recently following a downgrade by the ratinng agencies. So I had say sue them to bankruptcy and recover whatever money investors have lost in the past.

6 Nov 2012 2:02 PM

Bruce Arnold wrote:

It's a "First" Amendment shield, relating to the freedom of speech; the Fifth sets out the right not to incriminate oneself. Also, while the rating agencies claim a First Amendment privilege, it's unclear whether any court has ever explicitly agreed. After all, a physician who mis-diagnoses can't claim that his or her speech was of a type that attracts constitutional protection. (The tide turns for ratings agencies, November 6)

6 Nov 2012 5:46 PM

Neil Bradley wrote:

Good article. (The tide turns for ratings agencies, November 6) It showed as a glaring deficiency in the system during the GFC. Sophisticated financiers can do what they like, but there are a lot of unsophisticated investors that really do rely on these types of recommendations.

6 Nov 2012 5:48 PM


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  • doyla66
    doyla66 Tuesday, 06 November 2012

    Shawn Jewell wrote: On Banksia Financial's Website there is still a PDF for S&P giving Banksia an "Above Average" rating for it's "Robust Business Model" and "Loan servicing Standards". (The tide turns for ratings agencies, November 5) However the Loans in arrears chart started climbing markedly after the GFC.
    6 Nov 2012 1:36 PM

  • doyla66
    doyla66 Tuesday, 06 November 2012

    Warning: Unregulated Financial Environment: Get out and stay out

    "plain packaging and a wealth warning with graphic photos of impoverished investors, crying at the mortgagee sale of their homes, their children thrown out of school for non-payment of fees and all of them in tattered clothes, scrounging through bins for scraps of food to eat? I'm not kidding!!"


  • doyla66
    doyla66 Wednesday, 07 November 2012

    Another PONZI scheme ripping off decent Australian people. WARNING: Take your money OUT of them immediately, otherwise YOU will be the next to lose everything!

  • doyla66
    doyla66 Friday, 09 November 2012

    Take your money out of the AOFM? They are the investment and debt issuance arm of the federal government. You can't put your money WITH them. Also Wayne, I think you need to have a look at the definition of Ponzi scheme - it doesn't mean what I think you think it means.

    Also, rating agencies sound like a terrible idea until you consider the alternatives. Someone has to provide a view on creditworthiness because there are just not enough smart analysts for every fund manager to do their own. If you were to remove the rating agencies the costs to large business of raising funds would skyrocket - they would have to pass this on to small business and consumers so before you agitate for the regulation and or removal of rating agencies, ask an informed person what the consequences might be.

  • doyla66
    doyla66 Wednesday, 14 November 2012

    Captain Kipper, Banksia WAS a PONZI scheme. I think what Wayne meant was to take your money out of these Managed Investment Schemes.
    Regulation of the ratings agencies is essential, especially now that it has BEEN PROVED IN COURT that they are deceptive, negligent & misleading! Standard & Poors rating agency has just been fined $20,000,000 by the Australian courts. Federal Court Justice said in her judgment that a reasonably competent ratings agency could not have rated the product AAA and that the rating was misleading and deceptive and a negligent misrepresentation to investors.

    Read more:

  • doyla66
    doyla66 Friday, 23 November 2012

    Here is a link to the AOFM and the history of their investments with our money into RMBS's. and their investment portfolio details are here

    You'll notice the large number of lenders on the list who have been involved in bad banking practises: First Mac, Challenger etc.

    Also basic contract law states that you have to PROVE you are a real party of interest. It is not enough to just SAY you are and then just send in the lawyers to the dirty work. That is called BULLYING and unconscionable conduct. If you cannot produce the contracts, signed by both parties then there is no proof and you have no claim. Bills Of Exchange Act 1909. Simple. "I lost it, the dog ate it etc" has no credibility and means you have no standing, and frankly sounds a bit like you are still in school making excuses about your homework.

    Where is the honour of our banking and lending executives? Corporations don't do this to people, People do this to people and it is the exec's who are the ones who are responsible and therefore should be accountable. It's pretty obvious really, isn't it?

    The corporate bank bullies and their associated henchmen are 'obviously' now concerned that they can no longer keep the truth concealed. Capt Flounder only needs to do a little research into the history of banking to know that money is simply created out thin air with a few keystrokes on the computer. "You need money? How much? Sure!! Not sure if you can repay? Don't worry, we'll 'make' the numbers fit for you, after you have handed in your signed documents! It's all safe as houses!" Oh crikey! That is no longer true is it!!!! We have to remember that fundamentally there is no debt to the homeowner, because, as we all now know, as soon as your loan is 'accepted' it is sold off into an RMBS and the bank is paid IMMEDIATELY in full, so $zero liability or debt for the bank. Then the mortgage and the Title are separated and the bank/lender gets paid to both manage (make sure you pay) and service the stock/securities (pay your interest payments to the investors), which is actually called 'double-dipping' and illegal in Australia but ASIC is blatantly ignoring this. Why?

    Heck, I forgot that Greg Medcraft of ASIC was responsible for setting all this up overseas before he was GIVEN the job at ASIC a couple of years ago, AND now his new job (starting in March I think) is at the international body for securitisation, so why WOULD he do anything against the banks... It would be like shooting himself in the foot!!

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