Documents included in the Justice Department’s lawsuit against Standard & Poor’s provide a glimpse at the company’s inner working in the run-up to the financial crisis. “Tensions appeared to be escalating inside the firm’s headquarters in Lower Manhattan as it publicly professed that its ratings were valid, even as the home loans bundled into mortgage-backed securities, or M.B.S., were failing at accelerating rates,†Mary Williams Walsh and Ron Nixon write in DealBook. “Together, the documents show a portrait of some executives pushing to water down the firm’s rating models in the hope of preserving market share and profits, while others expressed deep concerns about the poor performance of the securities and what they saw as a lowering of standards.â€
Some of the documents also showed some o the snarkiness among the rank-and-file over the impending crisis. One analyst in March 2007 borrowed from the Talking Heads, creating new lyrics to “Burning Down the House,†according to the complaint: “Subprime is boi-ling o-ver. Bringing down the house.†In a confidential memo reproduced in the complaint, one executive said: “This market is a wildly spinning top which is going to end badly.â€
At the heart of the civil case are the computer models S.& P. used to rate complex mortgage securities. The Justice Department claims that the faulty projections were not simply naïveté, but rather a deliberate effort to produce inflated, fraudulent ratings. “The complaint asserts that S.& P. staff chose not to update computer programs because the changes would have led to harsher ratings, and a potential loss of business,†Peter Eavis writes. But S.& P., which says the lawsuit is without merit, disagrees with the government’s characterization of the models. Catherine J. Mathis, an S.& P. spokeswoman, said the Justice Department had not “shown actual adjustment to the models or other changes that were not analytically justified.â€
Indeed, the government faces an uphill battle in making its case that S.& P. intentionally inflated ratings. “The government will have to prove that ratings were in fact faulty, and published intentionally so as to deceive investors in the securities. In response, S.& P. could simply argue that the company was just as blinded by the financial crisis as anyone else, and that questionable e-mails are simply the work of lower-level employees who were not involved in the decision-making,†Peter J. Henning and Steven M. Davidoff write. “Even if the Justice Department can prove the agency acted to deceive investors, it still has to deal with something lawyers call reliance. In other words, did investors rely on these ratings to make their decisionsâ€
R.B.S. APPROACHES SETTLEMENT OVER RATE-RIGGING  | The Royal Bank of Scotland said on Wednesday that it was in advanced discussions with authorities on both side of the Atlantic over settling accusations that it manipulated Libor. “Although the settlements remain to be agreed, R.B.S. expects they will include the payment of significant penalties as well as certain other sanctions,†the bank said.
A settlement, which could be announced as soon as Wednesday, is expected to include a penalty of about ! £400 mil! lion ($626 million), according to several news reports. “As part of the anticipated deal, R.B.S.’s Japanese unit is expected to plead guilty to a crime in the U.S., although the Justice Department isn’t expected to charge any individuals, according to one of the people briefed on the talks,†The Wall Street Journal writes. John Hourican, the head of R.B.S.’s investment bank, is also expected to resign, the reports said.
DEBEVOISE DROPS TRUSTS AND ESTATES PRACTICE  | Debevoise & Plimpton, the prominent white-shoe law firm, is eliminating its trusts and estates practice, DealBook’s Peter Lattman reports. Michael W. Blair, Debevoise’s presiding partner, said in a statement that the frm was helping the group’s eight lawyers â€" including Jonathan J. Rikoon, the partner in charge of the practice â€" find new posts.
Lawyers exchanged whispers about the news at a conference in Florida last month, Mr. Lattman writes. “Debevoise’s decision surprised members of the trusts and estates bar. If an institution as prestigious and financially sound as Debevoise was abandoning its practice, were they vulnerable too†Mr. Lattman continues: “Corporate law firms once viewed trusts and estates as a small yet important practice that discreetly advised wealthy families. But drafting wills and trusts, and the legal matters that flow from that, is less lucrative than the primary revenue drivers at big law firms: multibillion-dollar corporate transactions and high-stakes litigation.â€
ON THE AGENDA Â |Â Time Warner reports earnings before the market opens. IAC/InterActiv! eCorp, News Corporation and Visa announce results on Wednesday evening. The House Financial Services Committee holds a hearing at 9 a.m. on the role of the Federal Housing Administration in the mortgage insurance market. Martin Sorrell, chief executive of the British advertising giant WPP, is on Bloomberg TV at 8:15 a.m.
RESCUING THE TWINKIE  | The demise of Hostess Brands, the maker of Twinkies and other treats, “came at the hands of corporate America’s machinations,†Steven M. Davidoff writes in the Deal Professor column. “Its survival, however, depends on some of those same machinations. In the end, it was the extreme outcome of a liquidation in bankruptcy tha made the 83-year-old brand salvageable.â€
“All told, it appears that the sale of Hostess may reap over a billion dollars, almost twice what the creditors initially expected if it had not been liquidated. In other words, the liquidation of Hostess has made the company worth more.â€
ZYNGA AT A CROSSROADS  | Zynga released fourth-quarter earnings on Tuesday that were better than expected but still showed the significant challenges the company faces, after losing much of its market value since its I.P.O. “In the next few months, Zynga faces a critical test,†David Streitfeld writes in The New York Times. “Can it successfully put its most popular Web games, starting with Farmville, on mobile devicesâ€! To Mark Pincus, Zynga’s founder and chief executive, 2013 is “a year of investment and transition.†Mr. Streitfeld says: “The pain accompanying Zynga’s transition to mobile was evident in the earnings report. Revenue was $311 million, flat with the year before. Daily users of the games were down 6 percent from the third quarter, a clear measure of flagging interest. More casual users dropped as well.â€
Dell’s Lonely Club Deal  | Michael S. Dell will account for about three-quarters of the deal’s equity. Few other companies have a structure that would allow for anything on Dell’s scale, Robert Cyran of Reuters Breakingviews writes. DealBook Â'
Reasons to Be Suspicious of Buyouts Led by Management  | Dell shareholders take note. Many management-led buyouts have been successful enriching management at shareholder expense, Steven M. Davidoff writes in the Deal Professor column. DealBook Â'
Dell’s Record-Breaking Buyout  | The $24.4 billion buyout of Dell sets a number of private equity records. Here is alook at the buyout boom, bust and recovery. DealBook Â'
The Army Behind Dell’s Big Deal  | Gigantic leveraged buyouts don’t happen all by themselves. Roughly a dozen advisers were involved in the $24.4 billion takeover of Dell by its founder, Michael S. Dell, and the investment firm Silver Lake. DealBook Â'
Rivals Don’t Mean to Rain on Dell’s Parade, but …  | Dell may be promoting its $24.4 billion leveraged buyout as the next step in its turnaround plan. But some of the computer maker’s rivals, including Lenovo and H.P., couldn’t resist throwing a few jabs at the company all! the same! . DealBook Â'
Twitter Buys a Social TV Analytics Company  | The Media Decoder blog reports: “Twitter confirmed on Tuesday that it was acquiring Bluefin Labs, a company that analyzes online chatter about TV shows and companies and sells its findings. Twitter is paying nearly $100 million for Bluefin, according to a person with direct knowledge of the sale, making it the Web site’s biggest acquisition to date.†NEW YORK TIMES MEDIA DECODER
About.me Parts Ways With AOL Â |Â About.me, an online identity Web site, said it had bought itself ack from AOL, which acquired the company two years ago, the Bits blog reports. NEW YORK TIMES BITS
Prominent Goldman Economist to Retire  | Jim O’Neill, the Goldman Sachs economist who a decade ago coined the term “BRICs,†plans to retire later this year, the firm announced on Tuesday. DealBook Â'
JPMorgan Said to Cut Pay in Investment Bank  | Bloomberg News reports: “JPMorgan Chase & Company paid investment bankers a! nd trader! s about 3 percent less in 2012 as shaky economies in the United States and Europe put a damper on deals, said two people with knowledge of the firm’s compensation.†BLOOMBERG NEWS
Italian Bank May Reveal Losses Hidden by Derivatives  | Bloomberg News reports: “Banca Monte dei Paschi di Siena, engulfed by criminal probes into the conduct of its former management, may disclose as early as today the size of losses the bank hid in 2008 and 2009 using derivatives.†BLOOMBERG NEWS
Goldman’s Blankfein Discusses Policy After Meeting With Obama  |Â
FOX NEWS
Defending the Tax Treatment of Carried Interest  | The Private Equity Growth Capital Council, an industry group, has a new video arguing that private equity profits, known as carried interest, should continue to be taxed as capital gains. PRIVATE EQUITY GROWTH CAPITAL COUNCIL
In China, the End of a Private Equity ‘Dreamland’  | Bloomberg News reports: “Many Chinese private companies are seeking prices dating back to a time when the nation’! s economy! was growing at more than 10 percent, compared with 7.8 percent last year. They aren’t budging even as the number of private-equity deals in China fell an unprecedented 43 percent last year and domestic initial public offerings, which private-equity firms count on to exit the investments, tumbled 70 percent.†BLOOMBERG NEWS
French Official Sticks Up for Hedge Funds  | Reuters reports: “Hedge funds play a vital role in the French economy, finance minister Pierre Moscovici said, in comments aimed at defending a government plan to ring-fence banks’ proprietary trading and leave hedge-fund financing intact.†REUTERS
QFS Asset Management Liquidates 2 Funds  |Â
ABSOLUTE RETURN
Twitter Chief Says an I.P.O. Isn’t Certain  | Asked when Twitter would go public, Dick Costolo, the chief executive, told The Wall Street Journal: “It’s not necessarily inevitable. There are lots of different choices companies can make now.†WALL STREET JOURNAL
Survey Finds Most Facebook Users Have Taken a Break  | The Bits blog reports: “A new survey by the Pew Research Center‘s Internet and American Life Project, conducted in December, found that 61 percent of current Facebook users admitted that they had voluntarily taken breaks from the site, for as many as several weeks at a time.†NEW YORK TIMES BITS
Pinterest Said to Seek $2.5 Billion Valuation  | Pinterest, the popular scrapbooking site, is in talks to raise a rond of financing at a valuation of $2 billion to $2.5 billion, The Wall Street Journal reports, citing unidentified people familiar with the matter while cautioning that no deal has been closed. WALL STREET JOURNAL
Security Pioneer Develops Service to Encrypt Calls and Text Messages  | Phil Zimmermann, the creator of Pretty Good Privacy, introduced a new service, Silent Circle, which “lets users make encrypted phone calls, send text messages and do videoconferencing,†the Bits blog writes. NEW YORK TIMES BITS
Nasdaq Said to Be in Settlement Talks Over Facebook I.P.O.  | The Wall Street Journal reports: “Nasdaq is in preliminary talks with the Securities and Exchange Commission over a potential settlement related to its botched handling of Facebook’s much-anticipated offering, according to people with knowledge of the discussions. While a settlement agreement isn’t assured, the two sides are discussing a monetary penalty of about $5 million, people involved with the discussions said.†WALL STREET JOURNAL
Fed Says It Was Victim of Cyberattack  | The Wall Street Journal reports: “The Federal Reserve acknowledged Tuesday nightthat it had suffered a cybersecurity breach, making it the latest government victim of hackers.†WALL STREET JOURNAL
Obama Presses Congress to Act to Avoid Cuts  | The New York Times reports: “President Obama on Tuesday called on Congress to quickly pass a new package of limited spending cuts and tax increases to head off substantial across-the-board reductions to domestic and military spending set to begin on March 1, but his appeal for more revenue was dismissed by Republicans.†NEW YORK TIMES
H.P. Board Is Said to Be Studying Possibility of a Breakup  | Hewlett-Packard directors “have discussed the details of a possible breakup scenario,†but “a separation of its units may not be in the cards,†Quartz reports, citing unidentified people familiar with the matter. QUARTZ
