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Ex-S&P Analyst Who Warned Bosses Says He’s No Whistle-Blower

FEB 7, 2013 11:16am ET
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One former Standard & Poor’s analyst who told his bosses that they shouldn’t weaken their standards to win more business finds himself at the heart of the U.S. Justice Department’s $5 billion case against the ratings firm.

That man, dubbed “Executive H” in the government’s lawsuit, is Frank Raiter, a former managing director for residential mortgage-backed securities at S&P, the world’s biggest debt-ratings provider. Raiter now lives on a rural Virginia farm.

S&P supervisors ignored Raiter when he said they should implement a model that would have made banks include more protection in the bonds that contributed to the 2008 financial crisis, according to the lawsuit filed Feb. 4 in federal court in Los Angeles.

“I’m not a whistle-blower,” Raiter said yesterday in a phone interview. “Ultimately, I just took early retirement because I couldn’t go along with their programs.”

Raiter said he hadn’t heard from the Justice Department since it contacted him in 2010 and that he hopes he won’t have to travel to California to testify. The former Marine and community banker retired from S&P, a unit of New York-based McGraw-Hill Cos., in March 2005 after clashing with his bosses, Bloomberg reported in 2008.

The lawsuit wiped out $3.9 billion of McGraw-Hill’s market value this week as shares tumbled 24% to $44.40 at 9:46 a.m. in New York.

Settlement talks broke down after the government sought a fine of more than $1 billion and an admission of wrongdoing from S&P, the New York Times reported. S&P’s allegedly inflated ratings were at “the very heart of the recent financial crisis,” Attorney General Eric Holder said at a Feb. 5 news conference.

“Any allegations that we compromised our analytical integrity for business considerations are simply false,” Ed Sweeney, an S&P spokesman, said in a phone interview.

In other cases, executives who provided evidence to the government have sought and received riches. Bradley Birkenfeld, a former UBS AG banker who went to prison after telling the U.S. how the bank helped Americans evade taxes, was awarded $104 million in 2012 after the Swiss bank agreed to pay $780 million to avoid prosecution. Raiter, who testified before the U.S. House in 2008 and Senate in 2010, said he isn’t seeking a reward.

“There are people like that,” said Alan Konigsberg, a lawyer in New York who has worked on whistle-blower cases. “Not many.”

Relying on mathematical models, S&P and competitor Moody’s Investors Service awarded AAA ratings to mortgage securities packaged during the five-year housing boom, deeming them to be as safe as government bonds. About 90% of AAA securities backed by subprime mortgages from 2006 and 2007 were later downgraded to junk, the Senate Permanent Subcommittee on Investigations said in a 2011 report.

S&P developed a new model in 2004 that would generate more accurate ratings for mortgage bonds, called “LEVELS 6.0,” according to the government lawsuit. The updated system contained information on the riskier loans that were growing more prevalent at the time and would’ve made banks add more protection to deals to get top ratings, the U.S. said.

Raiter told other executives that they should implement the new model immediately and that S&P was allowing bonds to be sold without enough loss protection, according to the lawsuit. He was told that unless the upgrade would increase S&P’s revenue, there was no reason to waste money on it, the U.S. said.

S&P released a different version called “LEVELS 5.7” in 2006, after Raiter retired, the U.S. said in the lawsuit. An S&P employee, identified only as “Executive I” in the lawsuit, changed the model without “analytical justification” to make sure S&P’s ratings were no stricter than Moody’s, the U.S. said.

The lawsuit included an email from “Executive I” that also was published in 2010 by the Senate subcommittee, which identifies him as Thomas Warrack, a managing director at S&P. He didn’t return phone and e-mail messages seeking comment on the allegations.

In 2004, Raiter objected to a change in S&P’s procedures that would have required polling investors and investment bankers when changing ratings criteria, the government said. He wrote an email to Thomas Gillis, then head of criteria, and two other executives who aren’t named in the lawsuit.

“Are you implying that we might actually reject or stifle ‘superior analytics’ for market considerations?” Raiter wrote.

Still, the changes were made later that year, according to the lawsuit. Gillis, who remains at S&P, didn’t return messages seeking comment. S&P’s revenue from rating collateralized debt obligations almost doubled to $182 million in 2006 from $96 million a year earlier, the U.S. said.

“They were just enjoying the revenue, and by 2005, when I left, we were getting calls from corporate monthly: How much money are you going to make this month?” Raiter told the Senate panel in 2010. “Structured was driving the whole ratings business, and RMBS was the fastest-growing unit.”

Sen. Ted Kaufman, a Delaware Democrat, asked Raiter at the hearing why S&P employees had allowed the company to keep inflating its ratings.

“If you have been in business, the choices that you face in a dilemma like this is you can quit,” Raiter said. “If you have a family to support, that might be a little bit tenuous. And some of us chose to do just that.”

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