Suing S&P Over The Mortgage Crisis Is Crazy

I often laugh at news stories over at The Onion, which is a news site full of satire.  The headlines and stories are presented as real, but you usually find that they’re written to bring out laughs and are not based in fact.

mb-gavel201302I thought I had to be reading a story on The Onion when I recently saw that the United States of America is planning on suing Standard & Poors for up to $5 billion dollars due to the credit ratings issued by the ratings company on mortgage backed securities prior to the housing crash.

Basically, they’re faulting S&P for giving high credit ratings, which made them seem like good investments, accusing S&P of giving these high ratings even though there was evidence that the underlying mortgages were quickly degenerating into riskier and riskier assets.

I get that, and I have no doubt that the lawsuit is based in some fact, but I still maintain it’s absolutely ridiculous if for one reason: The United States government is suing S&P, but who is suing the United States government?

See, you have to think that if the United States is suing S&P, that they had some misgivings about their ratings at the time.  So, I did some digging and found that they issued no warnings about the ratings that I could find as S&P was issuing the ratings.

But, then, they must have issued some sort of warning about the housing market in general, right?  You’d think so, but once again you’d be pretty much wrong.  Yes, there were some people here and there who warned about such things, but leaders in either party did nothing to address the issue.  The Fed practically said ‘No worries, everything is good’ just months before the entire mess came crashing down.

So why don’t they get sued?  Why does the government, who did absolutely nothing, get to come out now and start suing companies for five billion dollars?  Granted, from my personal perspective, S&P did have some responsibility, but what absolutely kills me is that so did the United States government, yet they get to go out, file a lawsuit, and drag out a mess that I think most people would just now soon put in the past.

It seems that the strategy for dealing with this problem is to continue to file lawsuits.  Let’s sue as many banks as we can.  Let’s sue the ratings agency.  Let’s figure out who else we can sue.

I’m sure the thought is that getting sued will teach these institutions a lesson.  That they will pay for their mistakes.  That they won’t ever do it again.

I think that’s fairly inaccurate on all counts.

One reason: Turnover.  Lets’ face it, most of the leaders at a lot of these institutions are no longer in place.  So, what this means is that the current leadership is having to answer for the mistakes of their predecessors.   They’ve having to institute changes and policy and strategy based on things that they probably have already tried to deal with in some fashion, but are now having to deal with again and again.

What this does is it holds up progress.

I don’t think banks and ratings institutions have fixed everything as far as the  mistakes that they’ve made, but if you look at all of them, there are policies and things that they now do which are designed to prevent such a crisis from occurring.

Can the government say the same thing?  What changes have they made?  Banks have tightened their lending policies.  Ratings agencies have created additional due diligence procedures tied to their ratings and tightened standards.

The government has done virtually nothing.  Oh, except to file a bunch of lawsuits.

Great strategy.  Really.

Don’t get me wrong.  I’m not about letting the banks and ratings agencies off the hook.  I just think that the strategy here needs to concentrate on moving forward.  It’s not 2007 and we can’t go back and undo the mistakes that were made which led to the problems of the next few years.  What’s done is done, so what we need to do is make sure it never happens again.

Is the government filing a federal lawsuit or twenty federal lawsuits or two hundred federal lawsuits, or however many they decide is the ‘magic’ number, going to accomplish that?

No.

Instead of allowing these companies to work toward strengthening their balance sheets, reduce costs, and work toward a better future, the government has effectively committed these companies to diverting massive amounts of resources toward these lawsuits.  Do you think S&P is not going to dedicate millions and millions of dollars and time of their leadership to these lawsuits? Money and time that could be spent bettering the company will instead be spent looking to the past.

And for what?

I don’t know, I guess I equate it to someone coming home from work and finding that their dog has pooped in the living room.  They go and get the dog and rub its nose in the poop.  It might make the owner feel better and the dog is sure going to feel bad about it, but if the dog pooped hours and hours ago, is he really going to learn anything?  Oh, and what if the owner gave the dog a bunch of junk food the night before, which was likely responsible for the dogs digestive issues that day?  What should happen then?

In this case, the government is sitting there trying to rub the banks and agencies nose in the proverbial poop left on the floor.  If that’s their strategy, don’t you think it’s time for them to get on their hands and knees and rub their own nose in it?

Only in America.

Readers, what do you think about the lawsuits?  Do you agree that these companies need to be punished?  What about the government?  And, if you do agree that punishment is in order, do you think that punishment is the best method to prevent the same mistakes from happening in the future?

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