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 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.