S&P Insider Trading: A Wink & a Nod to Bond Funds

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


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.”



S&P Met With Bond Firms
WSJ, SEPTEMBER 7, 2011  

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