On February 4, 2013, the Department of Justice sued McGraw-Hill and its subsidiary, Standard & Poor’s, for fraud in rating mortgage-backed securities in the years leading up to the financial crisis. These were the RMBS and CDO investments*. The lawsuit has just been settled, along with lawsuits filed by 19 states and the District of Columbia. Public Citizen’s Bart Naylor discusses the settlement and the problems it may well create.
Naylor is one of many critics of the settlement, which involves the corporate shareholders paying the fine of about $1.4 billion, and the settlement admits no wrongdoing by any of the defendants. Naylor also points out that American taxpayers will be subsidizing the settlement because it will be deductible as a business expense on corporate tax returns. No individuals are held to account under the settlement.
Naylor says that “if the government is correct in its allegations from [its lawsuit], then some people lied. People made money by lying, and they should be serving time in prison.” Naylor believes the company itself should face criminal proceedings. The whole point of actions by the government should be to send a message that, when there is wrongdoing, the wrongdoers will be punished, not the shareholders.
The “too big to jail” term comes to mind in this situation. That was a term coined by Attorney General Eric Holder in discussing a settlement involving the HSBC bank. In this case, Naylor says, no one is too big to jail. There are other rating agencies than S&P. The problem, according to Naylor, is that S&P was “giving out easy grades” to companies selling the bogus mortgage securities for fear of losing the rating business to other companies.
Naylor feels that the way this settlement was handled, with its absence of punishment of bad behavior, makes it inevitable that this sort of thing will happen again. “It’s almost a mandate.” Naylor says that this is a Gresham’s law situation where a perceived need to engage in misconduct as a business necessity will eliminate anyone from trying to do the right thing at the expense of losing customers.
As to the size of the settlement, which sounds like a lot of money, Naylor concedes that the sum involved is about a year’s profit for S&P. However, he notes, the payment is coming from shareholder money. A better solution would be to require that the fine be paid out of executive pockets. This could happen if there were some changes in the way Wall Street operates. There is a proposal that executive compensation be partially withheld to establish a fund that could be used to pay judgments or settlements like this one.
Naylor hopes that this is AG Holder’s last case. In a situation where the company admits it was wrong and yet avoids any admission of that in the settlement is, in Naylor’s opinion, “a miscarriage of justice.”
* For a readable explanation of these securities, see “The Big Short” by Michael Lewis.
Bartlett Naylor is a Financial Policy Advocate with Public Citizen. Naylor is an expert on corporate governance, financial markets and shareholder rights. He was previously a consultant for Capital Strategies Consulting, the Director of the Office of Corporate Affairs for the Teamsters Union, and the Chief of Investigations for the U.S. Senate Banking Committee. Naylor has been quoted in The Wall Street Journal, The New York Times, The Washington Post, The Huffington Post, The Hill, The Washington Times, Dow Jones, among other media. The Legal Broadcast Network is a featured network of the Sequence Media Group.