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>So this was a conflict of interest that led to a really bad outcome, but it's not outright fraud. Interesting. Is there a strict legal difference? I guess I p

>So this was a conflict of interest that led to a really bad outcome, but it's not outright fraud. Interesting. Is there a strict legal difference? I guess I perceived it as a spectrum and the flagrantness of the conflict of interest and the profit derived from it seemed like it approached what I imagine as "fraud" in my head. But then again, I'm not a lawyer, or a banker, or an economist. Thanks for the reply, I'm now doing some more reading on this myself.

edblarney 10y ago
"Is there a strict legal difference?" Yes, definitely. If you're a banker selling bundled mortgages and say to a ratings agency: 'I'm going to give you some money, and I want you to lie on your credit rating report that you make of my financial product'. This is fraud. If you get keep getting bad credit ratings from some agencies, but some others give you good ratings - and you start to spend all of your budget on the agencies that give good ratings ... and then the ratings agencies that are losing business realize they are going out of business, and those agencies start to 'loosen criteria' (say for example, they stop doing extra diligence like physically visiting places and checking up on random selections of mortgages) ... then their credit ratings become less valid ... Then you don't have anyone committing fraud - but a cynical failure of the system. It's the same thing with Forrester and the other firms that give 'grades' on products. I worked at an F50 and we paid for tons of research from firms like that. They also would review our products and put them in the 'magic charts' of 'winners/leaders and losers'. It's a tricky conflict of interest ... if you don't buy their products, maybe you won't get good reviews. Now - that is almost fraud - if there is internal decision making that outlines this, i.e. research sales guys saying 'if you don't buy our research we will give you a bad review' or internal practices to that regard - it's probably illegal - or certainly highly unethical. But it never got to that. We just bought a lot of research. It's an issue wherever there is a conflict of interest and it's hard to manage. This is where the SEC could possibly have more impact/influence - in terms of specifying 'what must be done' in a rating. Ultimately, the market should correct itself - the 'ratings agencies' should have basically had their credibility completely blown up. They didn't. This is bad. Do you remember Enron? Arthur Anderson did their books. When Enron blew up - there was no 'regulating' needed. Arthur Anderson lost all of their business, because nobody wanted to have their books 'ok'd' by a company that has no integrity, when what they are selling is 'integrity'. It would be nice if bankers basically demanded good ratings. The Germans and Japanese lost 10's of billions because they never, ever imagined that Americans would lie about this stuff. Surely they have changed their ops a little bit ... but possibly not enough. Anyhow - I don't think there was a lot of fraud or malice. Just greed, laziness and stupidity, others are clearly more to blame than others.
- CalChris 10y ago
  Arthur Andersen was convicted of obstruction of justice. That's why they went out of business. The market didn't correct this inefficiency all by its lonesome. The legal system prosecuted this crime. http://www.wsj.com/articles/SB1023469305374958120 http://www.wsj.com/articles/SB1023469305374958120 And FWIW, that conviction was later overturned by the Supreme Court.
  - edblarney 10y ago
    AA's conviction does not put them out of business. AA's loss of customers put them out of business. That said - they may possibly have lost their legal ability to sign off on books, in which case, that could have done it, but even if they didn't, customers would run for the hills. There are handful of 'big accounting firms' that are basically the same. Why use the one that is criminal when you can use the next one over for the same price that is not? The whole point of AA is integrity of being an 'independent' auditor. If they don't have that, they don't have anything to sell, so no customers.
    - CalChris 10y ago
      Anderson had been the accountant for Waste Management and Sunbeam. They'd been fined for those cases and they expected to be fined again for Enron. Cost of doing business. They didn't lose their customers because of those cases. They lost customers with Enron because they were convicted. And they went out of business costing 10s of thousands of jobs.
  - ecorealist 10y ago
    Not sure if you realize this but Arthur Andersen "the company" was convicted, not some individual named Arthur Andersen. The discussion was about whether individuals would get prosecuted or if there are personal qualifies which allow some people to escape criminal prosecution.

edblarney 10y ago

"Is there a strict legal difference?" Yes, definitely. If you're a banker selling bundled mortgages and say to a ratings agency: 'I'm going to give you some money, and I want you to lie on your credit rating report that you make of my financial product'. This is fraud. If you get keep getting bad credit ratings from some agencies, but some others give you good ratings - and you start to spend all of your budget on the agencies that give good ratings ... and then the ratings agencies that are losing business realize they are going out of business, and those agencies start to 'loosen criteria' (say for example, they stop doing extra diligence like physically visiting places and checking up on random selections of mortgages) ... then their credit ratings become less valid ... Then you don't have anyone committing fraud - but a cynical failure of the system. It's the same thing with Forrester and the other firms that give 'grades' on products. I worked at an F50 and we paid for tons of research from firms like that. They also would review our products and put them in the 'magic charts' of 'winners/leaders and losers'. It's a tricky conflict of interest ... if you don't buy their products, maybe you won't get good reviews. Now - that is almost fraud - if there is internal decision making that outlines this, i.e. research sales guys saying 'if you don't buy our research we will give you a bad review' or internal practices to that regard - it's probably illegal - or certainly highly unethical. But it never got to that. We just bought a lot of research. It's an issue wherever there is a conflict of interest and it's hard to manage. This is where the SEC could possibly have more impact/influence - in terms of specifying 'what must be done' in a rating. Ultimately, the market should correct itself - the 'ratings agencies' should have basically had their credibility completely blown up. They didn't. This is bad. Do you remember Enron? Arthur Anderson did their books. When Enron blew up - there was no 'regulating' needed. Arthur Anderson lost all of their business, because nobody wanted to have their books 'ok'd' by a company that has no integrity, when what they are selling is 'integrity'. It would be nice if bankers basically demanded good ratings. The Germans and Japanese lost 10's of billions because they never, ever imagined that Americans would lie about this stuff. Surely they have changed their ops a little bit ... but possibly not enough. Anyhow - I don't think there was a lot of fraud or malice. Just greed, laziness and stupidity, others are clearly more to blame than others.

CalChris 10y ago
Arthur Andersen was convicted of obstruction of justice. That's why they went out of business. The market didn't correct this inefficiency all by its lonesome. The legal system prosecuted this crime. http://www.wsj.com/articles/SB1023469305374958120 http://www.wsj.com/articles/SB1023469305374958120 And FWIW, that conviction was later overturned by the Supreme Court.
- edblarney 10y ago
  AA's conviction does not put them out of business. AA's loss of customers put them out of business. That said - they may possibly have lost their legal ability to sign off on books, in which case, that could have done it, but even if they didn't, customers would run for the hills. There are handful of 'big accounting firms' that are basically the same. Why use the one that is criminal when you can use the next one over for the same price that is not? The whole point of AA is integrity of being an 'independent' auditor. If they don't have that, they don't have anything to sell, so no customers.
  - CalChris 10y ago
    Anderson had been the accountant for Waste Management and Sunbeam. They'd been fined for those cases and they expected to be fined again for Enron. Cost of doing business. They didn't lose their customers because of those cases. They lost customers with Enron because they were convicted. And they went out of business costing 10s of thousands of jobs.
- ecorealist 10y ago
  Not sure if you realize this but Arthur Andersen "the company" was convicted, not some individual named Arthur Andersen. The discussion was about whether individuals would get prosecuted or if there are personal qualifies which allow some people to escape criminal prosecution.