The very belated Federal civil suit against Standard & Poors is based on one very specific deal, with an extremely egregious email trail. Looking at the entirety of the crisis, the Credit Rating Agencies (the properly blamed CRA) were major players. Standard & Poor’s and Moody’s as well as the much smaller Fitch ratings agencies all appear to be culpable for similar frauds.

Here is what I accuse them of doing:

1. Business Model: They shifted their business model from an investor-pays-for-research to an underwriter-pays-for-ratings. Normally, any company is free to change their business model. But the major ratings are not just any business — these firms were all “Nationally Recognized Statistical Rating Organization” (NRSRO) — which the SEC allows other firms to rely on for regulatory purposes.

2. Ratings that were fraudulent: There is overwhelming proof that the ratings agencies knew what they were cranking out misrepresented the quality of the underlying bundles of paper. They did this because they were paid by the underwriters to generate an investment grade rating. THAT WAS THE SOLE PURPOSE OF THE RATING AGENCIES. Hence, why they were called the “great enablers of the credit crisis” by the likes of Joseph Stiglitz and the FCIC.

3. Ratings Based on Bad Assumptions: “Home prices never go down” is the silly excuse we have heard over and over again — except for the many, many examples that disprove this (Great Depression being the most prominent). That false assumption / limited data set allowed the rating agencys’ models to reach an investment grade, A rating. If they actually built in the possibility of lower home prices, and you cannot get the same ratings out of subprime mortgage securitizations. S&P may want to plead Stupidity, and I suspect the prosecution will defer — but stupidity does not present a shield to civil liability.

4. Ratings that were not rated: The sheer volume of mortages moving through ther system overwhelmed everyone. Reports of securitized bundles of mortgages — unreviewed, unscrutinized, unanalyzed — yet nonetheless still managed to receive a AAA rating.

There are more examples, but let me simplify this for you: In an ultra low rate environment, Fixed income managers were under tremendous pressure to find yield. Their solution was to buy paper that was rated investment grade by the major credit ratings agencies EVEN THOUGH THEY KNEW OR SHOULD HAVE KNOWN IT WAS NOT. The agencies rated junk paper as AAA not because they believed it, but because they were paid to do so.

Had they not engaged in this sort of fraud, an enormous amount of securitizations of junk paper COULD NOT HAVE HAPPENED. There was no market for non-investment grade subprime paper. That many less CMOs means that many less RMBS means that many less junk mortgages underwritten.

I do not want to excuse the bad purchase decisions made by the buyers of this junk — they clearly violated one of the first rules of investments: Know what you own. However, the complexity of these products required they use third party analysts and agencies to facilitate the purchase decision. That is why the bad pourchases is merely lousy investing but the payola-like ratings are actual fraud.

It started with the Greenspan Fed, but the next group in our Calvacade of Blame are the rating agencies.

If Arthur Anderson received the ultimate penalty for their part in the Enron and other fraud, I see no reason why Moody’s and S&P don’t suffer the same fate — plus criminal prosecution for senior management.

Its time to re-establish the rule of law in this country.