Last Updated Aug 12, 2011 1:39 PM EDT
The SEC wants to know if S&P executives acted on inside information about its U.S. credit downgrade report. Given that everyone in the world knew the downgrade was coming, it's going to be pretty hard to prove. S&P started warning the report was coming in April. Then a week ago, the day before S&P released its now very tarnished report, the Dow dropped 500 points. The alleged causes were Spain and Italy going in the tank and rumors of the upcoming downgrade. Can it be insider trading if the whole world has the same information?
What would be suspicious is if S&P execs were making a lot of good trades any time in the last year or so. Not for insider trading purposes, but just because it would be nice to know if they ever showed any business sense.
This is not to single out S&P, Fitch and Moody's have hardly crowned themselves with glory, especially in the area of sovereign debt. Consider:
- S&P has tracked 15 government defaults since 1975. Of those, the firm rated 12 of the countries single-B or higher one year before the event. S&P's single-B rating is supposed to have just a 2 percent average chance of default.
- Of the 13 governments rated by Moody's within a year of a default, 11 were rated B or higher. Three were rated Ba (which is what Moody's calls double-B) which carries a 0.77% one-year default rate.
Rahul Dilip Shah: btw: that deal is ridiculousShannon Mooney: I know right -- model def does not capture half of the riskRahul Dilip Shah: we should not be rating itShannon Mooney: we rate every deal-- it could be structured by cows and we would rate it