The Ratings Game

[don]

we seem to be hearing this every other day . . .

Morgan Stanley successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.


According to the plaintiffs, the documents reveal that what the ratings companies describe as independent judgments were actually unsupported by evidence and written in collaboration with the bank that was packaging the securities.

http://www.bloomberg.com/news/2012-0...stors-say.html

now here's the thing - these same rating's desperadoes, at the flick of a pen, downgrade an entire country's cost of borrowing, a move which which enriches the same TBTFs (see above).

we need someone to connect the dots . . .

do we ever . . . .

[don]

Re: The Ratings Game

speaking of JP Morgan, monolines may just be the beginning of the end . . .

The monolines suing JP Morgan for RMBS putbacks got a BIG win today in Federal court. Judge Crotty showed he wasn’t buying the banks fancy legal arguments about needing to show a loan already blew up before you get your money back because you issued reps and warranties that weren’t actually true. This means New York lawyers at Patterson Belknap, under managing partner Philip Forlenza, are going to be really busy filing more monoline suits against JP Morgan now that their test case, Syncora v. EMC (owned by Bear Stearns now JPM), blew through this huge legal hurdle.

Syncora won on their loss causation request but didn’t get the judges stamp on their rescission request. In the hearing last week the puffy-chest Sullivan Cromwell lawyer for JPM, Bob Sacks, told Judge Crotty he didn’t have the ‘right’ to decide on the rescission issue that Syncora asked for; but in today’s decision the Judge flat out reminded Sacks he did. He then punted and said he just wasn’t going to rule on that request now as it’s best suited at trial when all the evidence is presented. Rescission means the monoline could putback the whole value of the $666 million security if they proved there was a material breach in the reps and warranties. Syncora doesn’t really need rescission (since they won on loss causation) to anti-up their negotiating power though.

The only thing we didn’t get out of the ruling is how many triple digit millions Syncora will estimate as damages but it’s going to be a lot more now that it’s not contingent on the loan already being in default.

Securities lawyers I spoke with say Crotty’s response was very favorable for the monolines but warned the decision was based on insurance law. So regular investors in the Bear Stearns issued securities will still have to prove they also have an ‘interest’ in the accuracy of EMC’s reps and warranties. Net Net they can’t assume a copy-cat decision and will need to spend more dollars getting their lawyers to do a bang up job beating JPM like the PBWT lawyers did.

Attorney Isaac Gradman, who writes the legal blog Subprime Shakeout, told me, “Though the court was careful to articulate that investors and insurers have differing interests, the logic used to argue why a breach adversely affects an insurer can be used to argue why a breach adversely affects a noteholder. The ruling undermines the banks’ suggestion that the only possible adverse impact is a loan default.”

I’d be watching if JP Morgan’s auditor or regulator makes them up their low rmbs putback legal reserves with this very strong decision against the bank by a federal judge. Remember if they have to reserve more capital it means they take a hit on earnings.
Syncora’s case is on the docket for trial in early 2013. Now we see if JP Morgan’s big law lawyers keep up the fight or finally settle and admit Bear Stearns wrote and sold mortgage back securities with crap loans and they knew it when they asked insurers to back them up.

http://www.teribuhl.com/index.php?s=...&submit=Search

updated in the second half of Keiser . . .