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I was wondered what ever happen with the Wall Street "insiders" who were pivotal players in the Scam of the Century -- what their "punishment" was, for all those "AAA" rating on Credit Default Swaps ... those "virtual claims of ownership" against slices of millions of sub-prime Home Mortgages?


... especially now that we are now supposedly in a new era of Accountability, I was wondering, now after 2 years of "mopping up" -- What ever happened to those Security Ratings Agency's who blindly stamped all those new-fangled "Virtual Securities" with Triple-A, Good Housekeeping 'Seals of Approval' --


Afterall these 21st Century, Paper-Landrush-Claims, were based on a Housing Market that was 'going gangbusters' -- appreciating 10% a year or more -- Pure Gold -- What could ever go wrong here?


Apparently that is a Question, the Security Ratings Agencies never asked themselves. [Moody's and Standard & Poor's, Fitch]


So as I'm prone to do when I wonder something, I researched it.

Here's the 'Readers Digest' version of what I found out ...


SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 62802 / August 31, 2010
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Moody's Investors Service, Inc.

I. Introduction

The Division of Enforcement has investigated whether Moody's Investors Service, Inc. ("MIS"), the credit rating business segment of Moody's Corporation ("Moody's"), violated the Nationally Recognized Statistical Rating Organization ("NRSRO") registration provisions or the antifraud provisions of the federal securities laws.
[...]

The Commission deems it appropriate and in the public interest to issue this Report of Investigation ("Report") pursuant to Section 21(a) of the Exchange Act.1 This Report cautions NRSROs that deceptive conduct in connection with the issuance of credit ratings may violate the antifraud provisions of the federal securities laws. Further, recent legislative provisions expressly provide that federal district courts have jurisdiction over Commission enforcement actions alleging antifraud violations when conduct includes significant steps within the United States or has a foreseeable substantial effect within the United States.
[...]


II. Facts
A. Coding Error

[...] Consequently, the unfunded Credit Default Swaps typically are closed out and new transactions are entered into (i.e., the portfolio of credit default swaps is "rolled over") when the indices are rebalanced. When the unfunded credit default swaps are rolled over, the difference in the spread from the last roll over is multiplied by the amount of the CPDO issuer's leverage and is either a gain or a loss for the note holders. The structure relevant here was designed to pay a high fixed return over a ten-year lifespan, paying out a two percentage point spread above London Interbank Offered Rate or the purported risk-free rate.

Because CPDO notes were new instruments, MIS had no existing model for use in rating them.  MIS [Moody's] created a model and in September 2006 gave the notes issued by the newly created CPDO issuer an AAA credit rating. By the end of 2006, MIS had issued credit ratings for notes issued by an additional eleven CPDO issuers. The notes of all twelve CPDO issuers were marketed in Europe.
[...]


IV. Conclusion

This report serves to caution NRSROs that, where appropriate, the Commission will utilize recent legislative provisions granting jurisdiction for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States. The Commission also cautions NRSROs that they should implement sufficient and requisite internal controls over policies, procedures, and methodologies used to determine credit ratings.

By the Commission.


OK, sounds like something went very wrong --

What does all that mean -- in plain English
please ...


THE IMPACT OF DODD-FRANK – AND A WARNING TO RATING AGENCIES
SEC Actions -- a blog covering SEC Investigations, secactions.com
Prepared by: Thomas O. Gorman, Former Senior Counsel, SEC Enforcement Div.
Posted Sep 1, 2010

The Moody’s Investors Services, Inc. Section 21(a) report released on August 31, 2010 gives an indication of the potential impact of Dodd-Frank [Act]. It is based on an existing limitation of the enforcement program, but reflects the removal of that impediment by the legislation. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Moody’s Investors Services, Inc., Exchange Act, Release No. 62802 (Aug. 31, 2010).

The Report details the cover-up of a rating error by Moody’s European operations and the Commission decision not to bring an enforcement action because of a question regarding its jurisdiction. In the summer of 2006, Moody’s Investor Services, Inc. developed a new rating methodology for Constant Proportion Debt Obligation notes or CPDOs. These are special purpose vehicles that sell unfunded CDS on corporate debt indices. The issuers use the proceeds from the notes to purchase liquid instruments which can be sold to pay CPDO issuer obligations when specific events occur.

MIS developed a new model to rate the instruments which resulted in a rating of AAA. The instruments were marketed in Europe. Subsequently, it was determined that the metric in the rating model was inadvertently set too high. Several internal meetings were held at Moody’s Investor Services in France and the U.K. to analyze the matter. In April 2007, the rating committee voted not to downgrade the ratings for the affected notes. This decision was based in part on concerns regarding the reputation of MIS [Moody's].

In May 2008 the Financial Times published an article exposing the error. Following an internal investigation, the company acknowledged it. Prior to that time however, Moody’s registered with the SEC as an NRSRO. Those papers detailed the Core Principles for the Conduct of Rating Committees. The ratings here did not adhere to those principles.  [...]


Unh unh unh!   Bad Securities Raters!  

Don't you do that again.  Next time, someone important might lose their life savings.

And we on "The Commission" won't let that happen, you understand?

Better start following those "Core Principles of Conduct" now, before you "rate" another Security ... based on thin air.


Present Wrists !   ... consider them slapped.



The more things Change ... the more they really DON'T, eh --

even in this new era of Accountability, and Transparency,

ushered in apparently, by the NEW Facilitators of the Wealthy Few.


As.per.Usual.  

... the Status Quo of "the Few" has been maintained by "the Commission" (and the DOJ is nowhere to be found) ... All is Right in their World, once again.


As long as the Wealthy Few get everything they want -- What could ever go wrong here?


Originally posted to Digging up those Facts ... for over 8 years. on Fri Dec 10, 2010 at 09:03 AM PST.

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