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Does removing legal immunity mean anything to these people? Is there really going to be any reckoning this next time around? C-suite people never go to prison.

by danmg 7y ago

Does removing legal immunity mean anything to these people? Is there really going to be any reckoning this next time around? C-suite people never go to prison. If the company gets dinged, they just declare bankruptcy and reform under a new name, or some such maneuver where they keep operating.

jandrewrogers 7y ago
This is civil liability, and it does have real practical teeth that changes behavior. Previously, if they rated junk debt as AAA, and you bought that debt based on that rating, you would have no recourse for their misrepresentation of risk as they were granted immunity from such things. To make matters worse, for some regulatory purposes companies were required to buy instruments rated by these organizations and take these ratings at face value. With the change in law, if someone sells me junk debt rated as AAA by one of these NRSROs, I can now sue the NRSRO in court for damages for misrepresenting risk. For any particular rating, there are thousands of companies, often with deep pockets, who have standing to recover losses from the rating companies for misrepresentation of risk. Even if they avoid criminal liability, there is the very real prospect that the civil liability would destroy them.
- JackFr 7y ago
  Where is the responsibility of the investor? AAA ratings are not endorsements. The ratings (and rating agencies) exist to constrain the behavior of the buy side. Pension funds, insurance companies etc. are limited by laws and covenants to limit their exposure to non-investment grade securities. The models the rating agencies were using were not secret. They defined to a great extent what was allowed to go into a pool, and how much support and credit enhancement would be necessary for the senior tranche to get a AAA rating. So as a pension fund manager, if I see to pieces of AAA paper of similar maturity trading at radically different yields, I have to consider am I getting a deal, or does the smart money know something about one of these deals? And honestly if I just buy in bulk, relying on the rating alone without due diligence on the deals, shouldn't I bear some responsibility? Beyond that, it's not clear that you could prove civil liability. The ratings were based on models, and the models were based on historical experience (and some wishful thinking.) But when push comes to shove in the context of billion dollar lawsuits, you can imagine they'll tease the wishful thinking out of the models and show that their rating models, though flawed, were based on a reasonable interpretation of historical experience and that ratings are not an endorsement or a guarantee of suitability. As someone who witnessed the crisis up close, the ultimate cause of the crisis was a bunch of ordinary people, both on Main street and on Wall Street, making good faith decisions that seemed rational at the time, but in retrospect proved to be idiotic.
  - danmg 7y ago
    What's stopping them from claiming misfeasance or just 'unknown unknowns' in the face of malfeasance? Absent smoking gun emails where they laugh at how stupid their clients are for buying the crap, how do you demonstrate this to a jury in a civil case?

by danmg 7y ago

jandrewrogers 7y ago

This is civil liability, and it does have real practical teeth that changes behavior. Previously, if they rated junk debt as AAA, and you bought that debt based on that rating, you would have no recourse for their misrepresentation of risk as they were granted immunity from such things. To make matters worse, for some regulatory purposes companies were required to buy instruments rated by these organizations and take these ratings at face value. With the change in law, if someone sells me junk debt rated as AAA by one of these NRSROs, I can now sue the NRSRO in court for damages for misrepresenting risk. For any particular rating, there are thousands of companies, often with deep pockets, who have standing to recover losses from the rating companies for misrepresentation of risk. Even if they avoid criminal liability, there is the very real prospect that the civil liability would destroy them.

JackFr 7y ago
Where is the responsibility of the investor? AAA ratings are not endorsements. The ratings (and rating agencies) exist to constrain the behavior of the buy side. Pension funds, insurance companies etc. are limited by laws and covenants to limit their exposure to non-investment grade securities. The models the rating agencies were using were not secret. They defined to a great extent what was allowed to go into a pool, and how much support and credit enhancement would be necessary for the senior tranche to get a AAA rating. So as a pension fund manager, if I see to pieces of AAA paper of similar maturity trading at radically different yields, I have to consider am I getting a deal, or does the smart money know something about one of these deals? And honestly if I just buy in bulk, relying on the rating alone without due diligence on the deals, shouldn't I bear some responsibility? Beyond that, it's not clear that you could prove civil liability. The ratings were based on models, and the models were based on historical experience (and some wishful thinking.) But when push comes to shove in the context of billion dollar lawsuits, you can imagine they'll tease the wishful thinking out of the models and show that their rating models, though flawed, were based on a reasonable interpretation of historical experience and that ratings are not an endorsement or a guarantee of suitability. As someone who witnessed the crisis up close, the ultimate cause of the crisis was a bunch of ordinary people, both on Main street and on Wall Street, making good faith decisions that seemed rational at the time, but in retrospect proved to be idiotic.
- danmg 7y ago
  What's stopping them from claiming misfeasance or just 'unknown unknowns' in the face of malfeasance? Absent smoking gun emails where they laugh at how stupid their clients are for buying the crap, how do you demonstrate this to a jury in a civil case?