“Wow, that was a sobering meeting.”
-Western Asset Management, Stephen Walsh, CIO

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Did S&P leak US credit downgrade info to specific bond firms in advance of it occurring?

That is the subject of a WSJ article today, and should be a question the SEC is investigating:

“Standard & Poor’s Corp. officials held private meetings with large bond investors weeks before the firm’s historic U.S. debt downgrade, leaving some believing the chance of a credit-rating cut was higher than they previously thought.

Though S&P had put the U.S. on “credit watch” in mid-July, some investors were skeptical that S&P would actually strip the U.S. of its triple-A rating, maintained since 1941. S&P said in a news release on July 14 that “there is at least a one-in-two likelihood that we could lower” the U.S. ratings within 90 days.

In the following weeks, S&P officials visited large bond firms including Allianz SE’s Pacific Investment Management Co., Los Angeles-based TCW Group Inc., Legg Mason Inc.’s Western Asset Management and New York asset-management giant BlackRock Inc., according to people who either attended the meetings or were briefed on them afterward. Some of these investors say they came away with a stronger sense the nation’s debt rating would be cut.” (Emphasis added)

Recall years ago when a Goldman Sachs economist John M. Youngdahl told his bond desk he heard rumors of the cancellation of the 30 year bond — that led to his going to jail (but not the traders or the firm, who kept their apparently illicit gains).

If S&P told specific bond funds that material non public inside information — namely, that a US credit downgrade was coming — then how is this not illegal?

While there are protections for opinions and other speech, the nature of this being in S&P’s control puts them on a different footing than an outside 3rd party making assumptions, analyses and educated guesses. Remember, this is speech by S&P about what S&P might do. As John Coffee, a Columbia University securities-law professor, suggested, there comes a point where the ratings agency may have gone too far: “If you add a wink and a nod to that, I think that goes over the line.”

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Source:
S&P Met With Bond Firms
MATT PHILLIPS And JEAN EAGLESHAM
WSJ, SEPTEMBER 7, 2011  
http://online.wsj.com/article/SB10001424053111903648204576554642014670986.html

Category: Analysts, Credit, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “S&P Insider Trading: A Wink & a Nod to Bond Funds”

  1. [...] Were bond managers tipped that a downgrade of the US was coming?  (Big Picture) [...]

  2. buddhabucks says:

    Which may mean that after a wink and a nod it was a commitment and had to happen, even if the numbers were later found to be off by a Trillion or so…..

  3. Good Thing~! ol’ “Bag” is ‘on the Job’ .. which ‘Job’, of course, is, always, in Question..

    http://search.yippy.com/search?v%3aproject=clusty-news&query=U.S.%20Attorney%20General%20Eric%20Holder

    http://search.yippy.com/search?query=U.S.%20Attorney%20General%20Eric%20Holder%20Corporate%20Shill

    look! a Clue .. “…Remember, this is speech by S&P about what S&P might do. As John Coffee, a Columbia University securities-law professor, suggested, there comes a point where the ratings agency may have gone too far: “If you add a wink and a nod to that, I think that goes over the line.”…”

    Why do I get the impression that ‘Nancy Drew’ & ‘Encyclopedia Brown’, even, without the aid of a tricked-out (sp-)iPhone w/ Capt. Kricky App., could do a better Job than these compromised Hacks that We allow to ascend to High Office(s) (?)

    http://www.thefreedictionary.com/ascend
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Nancy+Drew+Encyclopedia+Brown

  4. Mike in Nola says:

    Poetic Justice that the Treasury market has done exactly the opposite of what was expected. Hope that the insiders didn’t just make a quick trade.

    Of course, it doesn’t matter if it was illegal. Who has been charged so far for all that went on that collapsed the world economy?

  5. fraud guy says:

    Their defense will be that it was just like frontrunning trades…just trying to help out their investors.

  6. Moss says:

    The first question is why do they even have ‘private’ meetings with investors in the first place?
    As George Thorogood would say ‘Bad to Bone’, the system that is. Criminality is an integral part of the system. It becomes part of the landscape, the status quo, standard operating procedure. Quid pro quo for the connected.

  7. wally says:

    What you say might very well be true in a country with a rule of law… but look around you.

  8. machinehead says:

    Consider this scenario: it’s 1981 and you’re Joe Granville, one of the most widely followed market letter writers of the day. The day before issuing a dramatic ‘sell everything’ call, you clue in your friends and family so they can step aside. Is that illegal — sharing your own private opinion with whomever you choose?

    As far as I know, it isn’t. And a similar distinction could be made between a publisher of ratings on securities (of which there are hundreds, when one includes market letters, mutual fund advisories, and the like) and corporate insiders, who are privy to non-public material information about specific securities.

    I’m skeptical of extending insider trading restrictions to the point that they regulate the manner in which personal opinions can be expressed by non-issuers of listed securities.

  9. eliz says:

    How is it not illegal that Congress and their staffers are free to engage in insider trading???
    Because they created laws that specifically exempt themselves.

    Yes, Virginia, the U.S. federal government is captured and massively corrupt.

    http://www.forbes.com/sites/kylesmith/2011/06/01/insider-trading-rules-that-dont-apply-to-congress/

  10. DeDude says:

    Agree with Moss. Even having private meetings with investors should be a crime. All kinds of walls that should be in place have been removed or was never erected – all for the purpose of making sure that the big guys have a special edge and ability to rip of regular small investors.

  11. macrotrader603 says:

    of course the info was leaked, the S + P sold off considerably that Friday

  12. macrotrader603 says:

    the system is rigged, but as long as you know that it is and trade accordingly, it’s no big deal