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US stock market daily report (February 05, 2013, Tuesday)

Contributed by Millennium Traders

The U.S. Justice Department is suing Standard & Poor’s Ratings Services, McGraw-Hill's (MHP), over claims that the firm intentionally rated mortgage investments incorrectly before the financial crisis, in attempts to earn more business from the banks that issued the investments. Allegations from the Government are that Standard & Poor’s knowingly inflated its ratings on risky mortgage investments that helped trigger the 2008 financial crisis. Attorney General Eric Holder said there was "no connection" between the lawsuit over its ratings of mortgage securities and the firm's downgrade of the U.S. government's debt rating. Associate Attorney General Tony West said "we think that at the very least," S&P is liable for more than $5 billion in civil penalties. Attorneys general from California, Connecticut, Delaware, District of Columbia, Illinois, Iowa and Mississippi - with many more states expected to sue - have joined the Justice Department in the lawsuit and have filed or will file separate, similar civil fraud lawsuits against S&P.

According to the lawsuit, the Justice Department allegations against S&P include that the firm knew home prices were falling and that borrowers were having trouble repaying mortgages yet, these realities were not reflected in the safe ratings S&P gave to complex real-estate investments known as mortgage-backed securities and collateralized debt obligations. At least one S&P executive who raised concerns about the company's proposed methods for rating investments was ignored. Justice Department claims S&P executives expressed concern that lowering the ratings on some investments would anger the clients selling these investments and drive new business to S&P's rivals. "Put simply, this alleged conduct is egregious and it goes to the very heart of the recent financial crisis," Attorney General Eric Holder said at a news conference Tuesday. Holder called the case "an important step forward in our ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history."

The Justice Department complaint includes a trove of embarrassing emails and other evidence that S&P analysts saw the market's problems early:
...In 2007, an analyst who was reviewing mortgage bundles forwarded a video of himself singing and dancing to a song written to the tune of "Burning Down the House": "Going – all the way down, with/Subprime mortgages." The video showed colleagues laughing at his performance.
...A PowerPoint presentation that year said being "business friendly" was a core component of S&P's ratings model."
...In a 2004 document, executives said they would poll investors as part of the process for choosing a rating. One executive asked, "Does this mean we are to review our proposed criteria changes with investors, issuers and investment bankers? ... (W)e NEVER poll them as to content or acceptability!" The executive's concerns were ignored, the government said.
...Also that year, an analyst complained that S&P had lost a deal because its standards for a rating were stricter than Moody's. "We need to address this now in preparation for the future deals," the analyst wrote.

Acting Associate Attorney General Tony West said the documents "make clear that the company regularly would `tweak,' `bend,' delay updating or otherwise adjust its ratings models to suit the company's business needs." He said that in 2007, S&P issued ratings that it "knew were inflated at the time they issued them." According to one document cited in the lawsuit, S&P was well aware that the subprime mortgage market was collapsing by 2006, even though S&P did not issue a mass downgrade of subprime-backed securities until halfway through 2007. The mortgages were performing so poorly "that analysts initially thought the data contained typographical errors."

In a 2007 email, another analyst said some at S&P wanted to downgrade mortgage investments earlier, "before this thing started blowing up. But the leadership was concerned of p(asterisk)ssing of too many clients and jumping the gun ahead of Fitch and Moody's." S&P typically charged $150,000 for rating a subprime mortgage-backed security and $750,000 for certain other securities. If S&P lost the business to Fitch or Moody's, its main competitors, the analyst who issued the rating would have to submit a "lost deal" memo explaining why he or she lost the business. Even if it meant approving sloppy ratings, S&P analysts ended up trying to keep banks, its clients, happy. If S&P is found to have committed civil violations, it could face fines and limits on how it does business.

The Justice Department civil charges are the first against a rating agency since the financial crisis. The claim refers to CDOs in 2007 related to mortgage-backed securities just before the financial crisis.

Standard & Poor’s said in a statement they will vigorously defend against the suit and that their analysts provided good-faith ratings. S&P, a unit of New York-based McGraw-Hill Cos., called the lawsuit "meritless" in a lengthy statement. "Hindsight is no basis to take legal action against the good-faith opinions of professionals," the company said. "Claims that we deliberately kept ratings high when we knew they should be lower are simply not true."

Dell Inc. (DELL) confirmed in an announcement on Tuesday, Chief Executive and founder Michael Dell and a private-equity firm Silver Lake will take the company private in a $24.4 billion deal. Microsoft Corp. (MSFT) will assist in financing the deal, providing a $2 billion loan. “I believe this transaction will open an exciting new chapter for Dell, our customers and team members,” Michael Dell said in a statement. “We can deliver immediate value to stockholders, while we continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers as a private enterprise.” In unveiling the buyout deal, Dell argued that the company “has made solid progress executing this strategy over the past four years.” “But we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision,” he added. “I am committed to this journey and I have put a substantial amount of my own capital at risk together with Silver Lake, a world-class investor with an outstanding reputation.” “We are committed to delivering an unmatched customer experience and excited to pursue the path ahead,” Michael Dell said. Dell was once one of the most dominant tech hardware companies in the world and has struggled to cope with a fast changing tech market. Michael Dell started Dell from his dorm room at the University of Texas at Austin, sold custom-built PCs directly to consumers, making huge profit by keeping inventory down and not spending much on research and development, counting on innovations from chip makers like Intel Corp.(INTC) and software firms like Microsoft. For each share of Dell common stock, Dell shareholders will receive $13.65 in cash, representing a 25% premium over Dell’s closing price of $10.88 on January 11.

CoreLogic reported Tuesday that U.S. home prices, with 46 of 50 states registering gains for the year, grew 0.4% during December to stretch the year-on-year gain to 8.3% for the strongest advance since May 2006. Arizona had the strong year-on-year appreciation at 20.2%, even with prices down 39.8% from the peak. Nationally From the April 2006 peak, prices are down 26.9%. Pending index forecast from CoreLogic indicates a 1% monthly drop in January, reflecting a seasonal winter slowdown.