Wall Street Law Blog

Fraudulent AAA Credit Ratings Have Many Tentacles, Don't They?

Food for thought...

Isn't there a direct relationship between bogus AAA credit ratings and fraudulent SEC filings?

 

Let’s say, circa January 2006, a hypothetical investment bank’s mortgage securitization group solicited and obtained AAA credit ratings (via ratings shopping) for RMBS (or related structured products) even though the bankers KNEW that, in reality, the mortgage bonds were far riskier than AAA rated investments are supposed to be. 

Now, let’s say that the same bank is holding some (or even a lot) of these dubious AAA rated mortgage-backed securities at the end of the 2006. 

 

 

AAA Credit Ratings Like Octopi?

 

 

Wouldn’t Bear Stearns - er Lehman - er Merrill ...  I mean, wouldn’t the hypothetical bank - knowing that the AAA ratings were bogus - account for the bonds in the annual report as if the bonds were virtually, if not entirely, riskless?  And, if so, how could the annual report be anything other than materially misleading (i.e., securities fraud and accounting fraud)? 

Just asking...

By Brett Sherman

The Sherman Law Firm, Publishers: Wall Street Law Blog 

March 2006: Wall Street concedes problems in housing market (WSLB Time Machine)

EXACTLY 2 YEARS AFTER BEAR STEARNS COLLAPSED, WE THOUGHT WE'D SHARE SOME WARNING SIGNS FROM ALMOST EXACTLY 2 YEARS BEFORE THE EVENTS OF MARCH 2008...

As reported by Bloomberg...

Bear Stearns, Lehman Mortgage Growth Crimped by Housing Market

"Executives at Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. said revenue from mortgage bonds in the U.S. is dropping as rising interest rates depress home sales. Lehman, the fourth-biggest U.S. securities firm, is cutting almost 200 jobs at two home-lending units in California.

Bear Stearns Cos. Chief Financial Officer Sam Molinaro said on a March 16 conference call after the company reported first-quarter earnings that he sees ``weakness'' for new mortgages across the industry."

 

Please check out the Bloomberg piece in its entirety.  It raises some interesting questions (as usual) - like, if you know there are problems with your main revenue stream in 2006, how can any competent risk management not take steps to make sure that the problem cannot snowball in the way that it did, driving two legendary firms out of business.

Brett Sherman, The Sherman Law Firm