The update incorporated data from 642,000 loans made between 1971 and 2001, including riskier loan types such as subprime, taken out by borrowers with poor credit, and Alt-A, often granted with reduced documentation, riskier terms or on investment properties.
That differed from the rules S&P was using that contained only 166,000 safer mortgages, according to the complaint. After the new model was discovered to have led to larger portions of deals receiving lower grades, S&P backtracked amid internal debate.
“When we first reviewed Version 6.0 results **a year ago** We saw the sub-prime and Alt-A numbers going up and that was a major point of contention which led to all the model tweaking we’ve done since,” an employee identified in the complaint as Senior Analyst B wrote. “Version 6.0 could’ve been released months ago and resources assigned elsewhere if we didn’t have to massage the sub-prime and Alt-A numbers to preserve market share.”
S&P Defense
S&P’s recognition that more-conservative standards could cost it business dated at least as far back as 2004, after an analyst sent an e-mail to managers saying Moody’s had been hired for a deal instead because it is was being too tough.
“Losing one or even several deals due to criteria issues, but this is so significant that it could have an impact on future deals,” the analyst wrote, according to the complaint. “There’s no way we can get back on this one but we need to address this now in preparation for the future deals.”
Floyd Abrams, the Cahill Gordon & Reindel LLP lawyer for S&P who represented the New York Times in the 1971 Pentagon Papers case, has emphasized the housing market’s collapse in discussing the case. Officials including Federal Reserve Chairman Ben S. Bernanke and then-Treasury Secretary Henry Paulson also failed to predict the severity of the crisis, the attorney said Feb. 5 in a Bloomberg Television interview.
No ‘Fraud’
S&P, investors, government officials and “every member of the Fed had views in 2007 about how bad the housing market collapse would be, which did not pan out,” Abrams said. “It was a lot worse than S&P predicted it would be, and a lot worse than everyone else predicted it would be.”
He said that “there wasn’t any fraud” because S&P employees “tried their best to come out with the right answers about what would happen. All the folks at the Fed back in 2007 and Chairman Bernanke and Secretary Paulson, everyone, just about all these entities, were pretty much in the same ballpark.”