Author Bethany McLean to Moneynews: S&P Was 'Doing Everything They Could to Sell'

Friday, 26 Apr 2013 07:19 AM

By Glenn J. Kalinoski and David Nelson

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Author and contributing editor at Vanity Fair Bethany McLean pulled no punches when describing the government’s lawsuit against Standard & Poor’s regarding its ratings preceding the financial crisis.

“The fascinating thing about the lawsuit is that it showed that those statements were … puff … that they were almost a mockery of S&P’s stated objectives to provide independent analysis that was totally free of any sales purpose,” McLean told Newsmax TV in an exclusive interview.

“When you read through that compliant, you came away saying this was a lie all along. They were doing everything they could to sell.”

Watch our exclusive video. Story continues below.



Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

McLean is a contributing editor at Vanity Fair, and co-author with Joe Nocera of "All the Devils are Here: The Hidden History of the Financial Crisis." Her first book, "The Smartest Guys in the Room," co-written with Peter Elkind, became an Academy Award-nominated documentary.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

“For a long time smart investors have been skeptical of the rating agencies,” she said. “They had rated Enron famously 'investment grade' right up until a couple days before its collapse.”

She pointed out the subsequent congressional hearings and outpouring of outrage. But the rating agencies may be untouchable. “The rating agencies have been able to pull off legal challenges for all of their history,” she said.

“People have tried to bring lawsuits against them. They have fought back, [claiming] freedom of speech, so they are almost, in some ways, invulnerable, and I say that because everybody is vulnerable in some way at the end of the day," she said.

"You would like to believe that this would cost the rating agencies, Standard & Poor’s, market share … and that the investors would say, ‘You’re telling me that this was just puffery.’ ”

McLean said the agencies possibly could suffer reputational damage from such controversy. “But they don’t have much of a reputation left anyway. Everybody knows the role they played in the financial crisis," she said.

“The rating agencies certainly aren’t solely to blame, but they got it wrong in a big way. The smart investors have thought for years … that the rating agencies get it wrong when it matters. They are … in terms of their market position, invulnerable," she said.

"They are so interwoven in the fabric of our market that it is almost impossible to get rid of them and it almost doesn’t matter if they are any good at their jobs or not. You can’t get rid of them.”

The Wall Street Journal reported that Standard & Poor’s asked a federal judge to throw out the $5 billion fraud lawsuit brought by the Justice Department. The Journal said the action deals with the period before the financial crisis of 2008. S&P is accused of claiming to be “objective” and “independent” and, to please clients, assigning AAA ratings to mortgage-backed securities S&P knew were more risky. S&P denies this.

“I believe there should be ethics in finance and when I went into writing about the financial crisis I wrote a piece for The New York Times about how we should blame the borrowers for taking out mortgages that they couldn’t afford,” she said.

“We were all at fault," she said. "I firmly believe that we, homeowners, across America played a role in this, too, but should it be all on homeowners to defend themselves against dubious mortgage propositions? Shouldn’t financial services companies take some responsibility for the kinds of products they sell? I have come to believe that responsibility should be a two-way street.”

McLean also cautioned about the conflict of interest that exists in the business model of rating agencies in which they are paid by the companies they are rating.

“It is a problem and you certainly saw it in the financial crisis,” she said. “S&P wanted to keep the money rolling in. The way to keep the money rolling in was to stamp these securities with AAA ratings, but there are other problems built into the market," she said.

"One is that the very importance of ratings in the market makes it very hard for them to change their ratings because it will cost so many people so much. Once they rated something AAA, that means money market funds can hold it. It means a whole host of things, and so for the rating agencies to downgrade comes with such a set of consequences that there is almost too much weight on a downgrade.”

Elsewhere, she expressed concern about Apple.

“The big risk in Apple is that such a big percentage of its profits come from the iPhone; roughly two-thirds of its profits are iPhone-related,” she said.

“Maybe it’s a little too strong to say it is under siege, but it certainly is a challenge and if you look at the track record over time of phone makers it’s not good," she said.

"Nobody stays atop the market. What I would need to see is something that is going to take the place of the iPhone, and that’s the big risk with being short Apple … is that they could any day come out with that transformative product.”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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