S&P 'Burning Down the House' emails surface

An analyst's alleged jokes about subprime mortgages may hint at what the ratings agency knew before the financial crisis.

By Aimee Picchi Feb 6, 2013 2:04PM

Did Standard & Poor's foresee that the housing market would implode even as it ignored shaky mortgage bonds? The Justice Department thinks so, and it is suing the company for ignoring market risks in its unbridled desire to make money.


The government has some good ammunition on its side, including proof that S&P employees seemed to sense impending doom.


On the eve of the 2008 U.S. financial crisis, an S&P analyst reportedly decided to express his thoughts about subprime mortgages via the classic Talking Heads song "Burning Down the House."  


"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 sang, according to the government lawsuit.


The revised lyric probably isn't going to help public opinion about S&P, which the Justice Department sued Monday. S&P is owned by the McGraw-Hill Cos. (MHP).


The analyst, who wasn't named in the lawsuit, in March 2007 allegedly sent an email to several other analysts with the subject line "Burning down the house -- Talking Heads." It included a new lyric to the song, such as "Hey you need a downgrade now" and "Hold tight / Leveraged CDOs they were after / Going -- all the way down, with / Subprime mortgages," according to the lawsuit.


CDOs, or collateralized debt obligations, are risky derivatives that helped contribute to the mortgage meltdown.


Two days later, the lawsuit claims, the same analyst sent another email that included a video of him "singing and dancing" to the song's first verse "before an audience of laughing S&P coworkers," the lawsuit alleges.


The video was "obviously in poor taste," S&P spokeswoman Catherine Mathis told Bloomberg News. "While it may reflect a terrible sense of humor, it in no way reflects the hard work and analysis by the analysts rating securities."


Such emails and text messages cited by the lawsuit can help shed light on the "unvarnished perspective" of S&P's employees and executives, McCarter & English partner Robert Mintz told Bloomberg. "They tend to give jurors a flavor for the general atmosphere inside a company, and that in connection with other documents can often be quite damning."


S&P said that the lawsuit is meritless and that the company's ratings "reflected our current best judgments." 


More on moneyNOW

2Comments
Feb 6, 2013 7:23PM
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"...it in no way reflects the hard work and analysis by the analysts rating securities."

 

Hard work?  To be THAT wrong requires idiotic models or intentional misrepresentation.

 

It will be great to see S&P's lawyers explain how S&P employed idiots to come up with the models, because they sure as hell don't want a jury to decide intentional misrepresentation was the root cause.

 

And why wouldn't all the major banks sue S&P for negligence in rating AAA what turned out to be really bad investments?  (I know they WANTED them to be AAA, but that doesn't make it so.  What culpability does S&P have in their ratings?)

Feb 6, 2013 3:41PM
avatar

The worst job  has to be working for one of these special interest groups where all you do all day is come up with new attacks to launch against progressives. The pay’s probably pretty good (after all, big banks aren't exactly hurting for cash). But it can’t feel good to lie all the time. Come on now "democratic communist party DEMANDED banks hand out home loans" 

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