Standard & Poor’s employees joked about the company’s willingness to rate deals “structured by cows” and sang and danced to a mock song inspired by “Burning Down the House” before the 2008 global financial collapse, according to a U.S. government lawsuit.
Two S&P analysts in April 2007 discussed the company’s model for collateralized debt obligations, with one messaging that a deal was “ridiculous” and that S&P “should not be rating it,” according to the complaint filed yesterday in federal court in Los Angeles.
“We rate every deal,” the other analyst said in an instant message, according to the government filing. “It could be structured by cows and we would rate it.”
The analysts’ messages are among internal communications cited in the Justice Department’s complaint against S&P and its parent, New York-based McGraw-Hill Cos. The U.S. claims S&P defrauded investors by issuing ratings on billions of dollars in mortgage products while ignoring market risks, driven by a desire to increase revenue and market share.
In 2004, S&P discussed changing its rating criteria as executives internally raised concerns about losing deals to competitors.
One analyst in May 2004 wrote that the company was losing a “huge” deal to a competitor because S&P was more conservative than others, the government said.
“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 future deals.”
In 2007, one CDO analyst wrote to a former co-worker: “Does the company care about deal volume or sound credit standards?”
That same year, CDO analysts met to discuss what one called “the blow up” of the housing market, the government said. Afterward, one wrote to another that the “market will crash.”
In March 2007, an analyst wrote mock lyrics to the tune of “Burning Down the House” by the rock group Talking Heads.
According to the complaint, it began:
“Watch out / Housing market went softer / Cooling down / Strong market is now much weaker / Subprime is boi-ling o-ver / Bringing down the house.”
The government said the analyst later sent a video of himself singing and dancing the first verse “before an audience of laughing S&P co-workers.”
The case is U.S. v. McGraw-Hill, 13-00779, U.S. District Court, Central District of California (Los Angeles).
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