by Mike Masnick

Filed Under:
downgrades, investigation, ratings


Interesting Timing: News Leaks That Justice Dept Is Investigating S&P Just After It Downgrades US?

from the uh-huh dept

So just a couple weeks after S&P's (overhyped) downgrade of US debt, a story leaks that the Justice Department is investigating the S&P's ratings system. The reports say that the Justice Department investigation began before the downgrade -- which I absolutely believe to be true. It also notes that the focus is on conflicts of interest and a quote from an S&P managing director about not killing "the golden goose."

But, here's the thing. The timing of the news of the information getting out is certainly questionable. Even if the investigation is about mortgage debt, not sovereign debt, and even if it started before all this, just having it come out so soon seems like a clear shot at ratings agencies: downgrade the government and we'll ramp up our investigations of you. Does an action like this give Moody's or Fitch pause before changing their ratings on US debt? The report notes that it's "unknown" if only S&P is being investigated, or if all three are, which certainly seems like fair warning: downgrade us and we'll leak some dirty laundry.

As for the legitimacy of the investigation, again it seems to all go back to the fact that these firms ratings are seen -- in part due to US regulations -- as gospel fact, rather than just another opinion on value. That's a problem. Perhaps there's a case to be made that S&P's ratings people believed one thing while publicly stating another, and that can be turned into a fraud claim, but it seems like it may be a difficult case. A rating is still an opinion and an opinion is protected free speech. Getting over that hurdle is possible, but difficult. It seems like a much more effective way to stop S&P from abusing the system is to stop forcing organizations to treat its ratings as gospel. I would bet that would do a lot more damage than any lawsuit or criminal action against the company or its execs.

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  1. icon
    That Anonymous Coward (profile), 18 Aug 2011 @ 4:32pm

    When you have emails from S&P employees hoping to be retired before the entire house of cards falls, and publicly rating assets as AAA there seems to be a real problem.

    The reason they might be pursuing a civil action rather than criminal is well the Government gave them the laws they needed to hoodwink everyone. Opening that can of worms in court might cause even more problems, but a civil action pointing out that the company was aware of serious problems with things rated AAA and continued to push them and profit from those ratings as fraud can side step the examination of the rules.

    Civil rulings have lower evidence requirements, and I am sure just looking at the most toxic assets being rated AAA until the very end, while staff discussed how bad these things really were should make the case.

    There will be some sort of fine, and S&P will behave for a little while. This will not change the underlying structure of how they do business or the laws governing it, but will show the people the Government is "concerned" about them. Plus the added bonus of creating the impression for some that this is because of the downgrade, while pundits will seize on this and demonize it... it might put some fear into the right people who will stop using some of the loopholes.... until they think no one is paying attention.

    Whatever it works out to be, this is going to generate alot of talking heads talking. Everyone will spin it to suit their narrative, and nothing real will change.

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