Justice Department Goes After Standard & Poor’s

This investigation was launched prior to S&P’s downgrade of the U.S. credit rating.

Still, it is hard to imagine that this investigation is not in large part payback for the downgrade.

At issue here is S&P’s ratings of various mortgage securities.

The rating agencies had no idea what they were rating over the past decade as they put credit ratings on increasingly exotic mortgage-backed securities.

Subprime mortgages have little history. Only mortgages that fit prime borrowing standards have a history. Therefore, the rating agencies had no idea what they were rating and made the best guesses they could.

What made these guesses damaging was that the U.S. government demanded that one of three privileged ratings agencies slap some kind of rating on mortgage-backed securities instead of leaving things up to the free market.

The three main rating agencies say that their ratings are just their opinion and are protected by the First Amendment but if a Justice Department investigation shows corruption in the rating business, then that stance is harder to defend.

The New York Times reports:

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
This entry was posted in mortgage and tagged , , , , , . Bookmark the permalink.