What do Talking Heads and S & P have in common?

I enjoyed reading John Cassidy’s article in The New Yorker about America’s justice Department charging Standard & Poor’s with fraud over the rating of mortgage backed securities between 2004-2007. The case revolves around the activities of two teams at S & P:

1. A team that rated residential-mortgage-backed securities (RMBS),
2. A team that rated collateralised debt obligations (CDO’s).

These investment were based on subprimes mortgages taken out by borrowers who couldn’t pay – NINJA’s Non Income No Job or Asset. The Wall Street firms that produced these securities paid rating agency S & P big fees to rate them:

US$150,000 for RMBS’s
US$500,000 for CDO’s based on mortgages
US$750,000 for synthetic CDO’s based on derivatives tied to mortgages

Between 2005 – 2007 S & P CDO division made US$460m

The government claim that:

1. 2004 – 2007 S & P deliberately limited, adjusted, and delayed” changes to its statistical models and ratings criteria for subprime securities that would have resulted in the firm issuing lower ratings.
2. March and October of 2007, when it was perfectly clear that the housing bubble had burst, the firm “knowingly disregarded the true extent of the credit risks associated with” securities it rated.

One S & P employee was quite explicit in his views of what was happening in the RMBS market. In March of 2007, a person identified as “Analyst D,” who had studied a series of RMBS. issued in 2006, wrote an e-mail to several colleagues with the subject line “Burning Down the House—Talking Heads.” This is what it said:

Watch out
Housing market went softer
Cooling down
Strong market is now much weaker
Subprime is boi-ling o-ver
Bringing down the house

Hold tight
CDO biz—has a bother
Hold tight
Leveraged CDOs they were after
Going—all the way down, with
Subprime mortgages
Own it
Hey you need a downgrade now
Huge delinquencies hit it now
Bringing down the house

See the live version with David Byrne and Talking Heads – 1984

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