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U.S. Sues S&P; More Bad News from UBS, Barclays; Debate Over Mary Jo White Continues

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Charges Filed: The Justice Department is suing credit rating agency Standard & Poor's for allegedly ignoring their own standards and rating mortgage investments much higher than they should have been in years leading up to the financial crisis. Per the suit, filed by U.S. Attorney General Eric Holder: S&P "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P's analytical judgment, and represented S&P's true current opinion regarding the credit risks." According to Dealbook, prosecutors "have uncovered troves of e-mails written by S.& P. employees" that indicate concern over how mortgage investments were being rated. The complaint reproduces an internal instant message written by an S&P employee in April 2007 that reads "We rate every deal. It could be structured by cows and we would rate it."

The charges filed by the Justice Department are civil, not criminal, which has become par for the course when it comes to lawsuits related to financial crisis offenses. Less par for the course is the fact that the Justice Department is taking action against a credit rating agency and, shortly after news of the lawsuit broke, talk turned to whether the charges were likely to stick. "Will [be] tough [to] convict ratings agencies," BankThink contributor Mayra Rodríguez Valladares tweeted. "They will argue their default probability opinion is protected free speech." But others noted that defense hasn't always worked in private litigation against these firms. S&P's statement, issued shortly before the suit was announced, reads: "A DOJ lawsuit would be entirely without factual or legal merit. The DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith." No one seems to know yet if the Justice Department is looking into filing similar lawsuits against Moody's or Fitch. Wall Street Journal, Washington Post, Bloomberg News

More Bad News from UBS, Barclays: UBS, perhaps unsurprisingly given its recent Libor settlement, reported a fourth quarter loss of $2 billion, largely driven by legal expenses. The bank also announced plans to buy back 5 billion francs of its debt in order to reduce its financing costs. It warned that this move could lead to a loss in the first quarter of 2013 as well due to, as the FT notes, "accounting rules that force banks to book profits or losses based on movements in their own credit spreads." Also noteworthy is the fact that the Swiss bank has elected to move toward a "bail-inable" bonus scheme, paying thousands of senior bankers "in the form of bonds that can be wiped out if the lender fails to meet capital requirements." Meanwhile, the beleaguered Barclays said it plans to set aside an additional £1 billion in order to redress mis-sold financial products, including payment protection insurance and interest rates hedges, to consumers and businesses. This brings Barclays total bill related to mis-sold consumer products to £3.4 billion.

Wall Street Journal

Money-market funds are being "beset by excess cash," which is prompting the funds "to seek higher returns in investments that until recently were seen as too risky."

New York Times

Dealbook, following an article from last week that analyzed how Mary Jo White's connections could complicate her job as SEC chairman, argues some of her statements on corporate criminal liability are not as soft as many think. "In her Corporate Crime Reporter interview, Ms. White took the position that the SEC and other regulatory agencies were better equipped to police corporations than prosecutors by imposing structural changes on organizations to ensure future compliance with the law," Peter J. Henning writes. This "approach could well signal more vigorous enforcement by the SEC against companies found to have violated the law by requiring extensive changes in their operations in addition to the usual financial penalties."

Washington Post

The bond bubble is a misnomer, argues Wonkblogger Neil Irwin. Per the post: "Unless our political system becomes so dysfunctional that default becomes a real possibility … there's not much reason to fear default. Even during the height of the debt ceiling debate in August 2011 … rates fell rather than rose, as investors still viewed Treasuries as the safe place to park money when the world seemed dangerous."

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(Image: Bloomberg News)

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