Bloomberg News

S&P Rater Was a ‘Wuss’ for Bending for Bankers, Court Told

October 05, 2011

(Updates with ABN Amro comment in 12th paragraph.)

Oct. 5 (Bloomberg) -- Standard & Poor’s, bending to pressure from a bank selling investment notes, gave its highest rating to some that resembled a gambler’s tactic of doubling down on losing bets, an Australian court was told.

The ratings company, under investigation by the U.S. over the nation’s credit downgrade, was sued along with ABN Amro Bank NV., Royal Bank of Scotland’s Australian unit, by Australian towns over the sale of notes that plummeted in value during the global financial crisis in 2008.

“You are the wuss for bending over in front of bankers and taking it,” Sebastian Venus, who had prepared an internal model for the notes at S&P, told Derek Ding, an analyst responsible for rating the note, according to e-mail transcripts in a written version of the plaintiffs’ opening statement that was released by the court. “You rate something AAA, when it’s really A-?”

A dozen Australian townships claim they lost A$15 million ($14.3 million) of A$16 million invested in the Community Income Constant Proportion Debt Obligation Notes, or Rembrandts, as they were called. The notes were unwound less than two years after the towns bought them because credit spreads kept increasing and the notes’ cash value was exhausted, according to the court filing.

Doubling Down

“The CPDO strategy may be seen as a sophisticated version of the doubling strategy in which a gambler doubles his/her bet every time he/she loses, until a win occurs,” Columbia University Professor Rama Cont said, according to the submission. “A gambler with limited capital might eventually run out of capital before winning and lose everything.”

Venus also said the rating wasn’t his decision, according to the statement. “I am not responsible, I just helped build an internal model,” he said.

S&P denied it was pressured by the bank to give the notes the AAA rating, in an e-mailed response to Bloomberg News today.

“The councils are trying to deflect the weakness of their case by pointing to out-of-context e-mails,” the ratings company said. “We conducted our own analysis in line with our rating process.”

ABN Amro Bank was aware of the risks of the CPDOs, was in constant contact with S&P during the development of the notes and supplied data to the rating company, according to the court documents.

‘Highly Weird’

“Is it normal for rating agencies to allow banks to build their own models for snp to use to rate them?" ABN Amro Bank’s Paul Silcox, who was involved in the creation of the notes, asked Mike Drexler, a senior member of the Structured Credit Markets Group at the bank, in an e-mail cited in the documents.

‘‘No! It is not normal and highly weird,’’ Drexler replied. ‘‘An opportunity however.’’

In written submissions to the court, outlining its opening statement, ABN Amro Bank denied any wrongdoing.

S&P had rated the notes ‘‘thoroughly and independently,’’ the bank said in the court documents. The bank will present experts who will testify to that effect, ABN Amro Bank said.

ABN Amro Bank had no direct relationship with the councils and as a result holds no special duty to them, according to the court documents.

In developing the terms of the note, ABN Amro Bank employees Jamie Cole and David Poet agreed on a potentially good AAA structure and then Cole wrote Poet: ‘‘Perhaps we go and flog this for all its worth,’’ according to the plaintiffs’ submission.

The trial is scheduled for 10 weeks in Sydney.

The case is: Bathurst Regional Council v. Local Government Financial Services Ltd. NSD936/2009. Federal Court of Australia (Sydney).

--Editors: Suresh Seshadri, Terje Langeland

To contact the reporter on this story: Joe Schneider in Sydney at

To contact the editor responsible for this story: Douglas Wong at

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