S&P and the Puffery Defense
Yesterday the ratings agency S&P settled a lawsuit with the Department of Justice for awarding ridiculously high ratings for mortgage-backed securities way back when. For their massive contribution to the world-wide financial crisis, they got fined $1.5 billion, nobody went to jail, and they didn’t even have to admit what they’d done is wrong.
But here’s something they did admit: their use of the word “objective” when describing their models was mere “marketing puffery,” not to be taken seriously. This is called the “puffery defense” by Bloomberg.
To be fair, this wasn’t just about the usage of the word objective. From Bloomberg’s piece:
S&P said in its request to dismiss the case that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.
Now, as some of you know, I’m writing a book about destructive mathematical models. And pretty much all of the models make claims of being objective. It’s part of the marketing for those models, a requirement to lure people into using complex, mathematical black boxes instead of their own brains, and crucially, in place of their own sense of fairness and accountability.
Example: Value-added models for teachers are showered with claims of objectivity (see page 4 of this marketing brochure for example), even though those claims are questionable at best.
So, it makes me wonder, is the Puffery Defense going to be widespread? Is it a technical and legalistic approach? Are we going to have a redefinition of that word so that companies are officially allowed to claim objectivity while actually meaning nothing like objectivity?