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
    Richard (profile), 18 Aug 2011 @ 4:00pm

    Ratings Agencies

    Ratings agencies are not politically neutral. They are generally staffed by people with a certain background and outlook. They do a good technical job on individual small- medium company but on larger issues they are not trustworthy. On larger issues they are rather like news outlets - you wouldn't write the opinions of Fox News or the Daily Mail into law.

    reply to this | link to this | view in thread ]

  2. icon
    molecule (profile), 18 Aug 2011 @ 4:13pm

    except it doesn't sound like a DoJ leak.

    from the first paragraph of the NYT source article:

    "...according to two people interviewed by the government and another briefed on such interviews...."


    "Even though the Justice Department has the power to bring criminal charges, witnesses who have been interviewed have been told by investigators that they are pursuing a civil case."

    reply to this | link to this | view in thread ]

  3. icon
    The Incoherent One (profile), 18 Aug 2011 @ 4:17pm

    Not looking for the smoking gun

    Perhaps they are not looking for an agency or a person to pin this too. The fact that S&P (among others) rated the mortgage securities as AAA for so long which was a contributing factor to the "adjustment" is rather questionable. The timing of this is suspicous, but as is stated in the report this started before the US debt downgrade.

    Taking the teeth away from some of these ratings agencies may bring about some useful reform. Basing these kinds of decisions on more fact that emotion, or political followings.

    reply to this | link to this | view in thread ]

  4. 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.

    reply to this | link to this | view in thread ]

  5. identicon
    A Guy, 18 Aug 2011 @ 4:34pm

    I wouldn't be surprised if the downgrade was a partial response to an investigation by the justice dept. Why must it only be the government whom is acting maliciously? I believe both sides are equally capable of behaving like douche bags.

    reply to this | link to this | view in thread ]

  6. identicon
    Anonymous Coward, 18 Aug 2011 @ 4:55pm


    just a couple weeks after S&P's (overhyped) downgrade

    I don't think the actual downgrade was overhyped, unless you are talking about the subsequent (financially incompetent) media coverage. The downgrade came out at 8:30 pm ET on a Friday. If they wanted it to be overhyped almost any other time throughout the week would have been more appropriate. The way it happened, they gave investors, bankers and politicians the weekend to figure out what the fuck to do. What would have happened if they waited to 10 am on Monday and then through it in the mix?

    reply to this | link to this | view in thread ]

  7. identicon
    Anonymous Coward, 18 Aug 2011 @ 5:15pm

    Insider trading has been mentioned too.

    reply to this | link to this | view in thread ]

  8. icon
    The Mighty Buzzard (profile), 18 Aug 2011 @ 5:16pm

    Re: Not looking for the smoking gun

    Personally, I'd have just called it a stupidity tax and moved on rather than investigating S&P or bailing out the banks. It was lunacy for the banks to invest as much money as they did into something they barely, if at all, understood. S&P? They're as entitled to their opinion on the US's credit rating as they were on mortgage derivatives. And they should be given about as much credence as they deserved on the latter.

    reply to this | link to this | view in thread ]

  9. identicon
    hindsight being 20/20 etc, 18 Aug 2011 @ 5:27pm

    Hej Fund the Hedgehog

    Upon closer scrutiny, perhaps one might find that the real situation we have going on amounts to power jousting. After all, the administration couldn't go after big campaign funders right when he's climbing into his big Vader bus (made in canada just like where those who have controlling shares in S&P are from, coincidences abound). There must be some public staged act of accountability happening, or folks might get the wrong idea...

    If this were Ebert & Siskel rating a movie, that would be one thing, but no one gets a big position with S&P unless they have power & influence over financial institutions and governments. Are the puppet masters coming out of the closet? Nah. Voters should be so fortunate as to actually know how things really work in this world.

    reply to this | link to this | view in thread ]

  10. identicon
    out_of_the_blue, 18 Aug 2011 @ 6:23pm

    Well, ya use the hammer ya got, Mike, instead of ninnying

    about making a better hammer before can even start work.

    This is the 3rd piece where you say let poor little S&P alone, a clear pattern of siding with an iconic Wall Street firm for no /obvious/ reason. You've pointed out their fraud but don't want them investigated AT ALL.

    his is LONG overdue, and it's irrelevant whether NOW is due to retaliation. Let's just hope that some good comes of it, not just another whitewash by corrupt gov't officials of their pals in fascism.

    But I bet that it's limited hangout at most, so don't wring your hands any more, Mike. It's all theater.

    reply to this | link to this | view in thread ]

  11. icon
    Overcast (profile), 18 Aug 2011 @ 6:25pm

    Please do, and while you're at it, investigate about 95% of the rest of the investment world..

    The financial system is quite obviously *rife* with corruption, plus it would do far more for the 'good of the people' than seizing web domains of gambling or similar sites.

    reply to this | link to this | view in thread ]

  12. icon
    NotMyRealName (profile), 18 Aug 2011 @ 8:48pm

    I would be shocked if the vast majority financial institutions weren't in a more or less constant state of investigation.

    "And this is Tom, he's investigating... well... everybody, all the time. That way if anything ever comes up, we can honestly say we were investigating before hand."

    *Tom stops playing Angry Birds for three seconds* "and the benefits are great too!"

    reply to this | link to this | view in thread ]

  13. icon
    Michael (profile), 18 Aug 2011 @ 10:07pm

    I think it's a stretch to say it's a deliberate warning shot at other ratings agencies. You assume so much forethought on part of the Justice Department when S&P is all over the news and peoples' minds already.

    reply to this | link to this | view in thread ]

  14. icon
    The eejit (profile), 18 Aug 2011 @ 11:13pm

    Re: Ratings Agencies

    Uhhh, you've OBVIOUSLY not been paying attention.

    reply to this | link to this | view in thread ]

  15. icon
    The eejit (profile), 18 Aug 2011 @ 11:15pm

    Let's put it this way: this should have happened in 2007, when the housing bubble showed signs of strain, yet S&P (as well as others) kept giving toxic assets AAA ratings.

    The timing on this, however, is less than stellar.

    reply to this | link to this | view in thread ]

  16. identicon
    Anonymous Coward, 19 Aug 2011 @ 1:09am

    Culture Of Scheming

    Just remember the culture of scheming in the US finance industry, any time you have anything to do with it. The global financial crisis (mortgage debacle or CDO collapse) proved that the ratings agencies are under the control of the New York banks. That is not going to change.

    Do your own due diligence, every time. Luckily, that is easier than ever, now that we have the delights of the internet. Read Warren Buffett, he says a lot of good and useful stuff. But he is a bit naive about how many corporate psychopaths there are out there. Sure they are nice people, Warren, they are always going to be on their best behavior near you. See how they treat their lowly-paid staff or their ordinary shareholders, then you will see what they are really like.

    Statements from the New York banks and their friends are not to be trusted. The friends include: the ratings agencies, the financial press and the US government.

    The key to understanding America is to work out who is lying to who and why.

    reply to this | link to this | view in thread ]

  17. identicon
    Lawrence D'Oliveiro, 19 Aug 2011 @ 2:54am

    The US Govt Has No RIght To Investigate Standard & Poor’s

    Think of the conflict of interest in having a government agency investigate an agency that rates governments. No, they have no jurisdiction over S&P. It answers to a Higher Power, namely the Invisible Hand of the Market. That is the only Power that has the right to second-guess S&P.

    reply to this | link to this | view in thread ]

  18. identicon
    abc gum, 19 Aug 2011 @ 5:05am

    Re: Ratings Agencies

    "you wouldn't write the opinions of Fox News or the Daily Mail into law"

    Although some have tried.

    reply to this | link to this | view in thread ]

  19. icon
    Matt Polmanteer (profile), 19 Aug 2011 @ 5:57am

    Different Ratings

    I believe the issue they are looking into is the fact that S&P own analysts rated some of the CDO's to be lower but the business managers and higher ups over road them. They still gave the junk they were selling AAA. This is the problem when you are being payed by the very same people you are supposed to be rating especially when you have an incentive to give them higher ratings..

    reply to this | link to this | view in thread ]

  20. icon
    The Devil's Coachman (profile), 19 Aug 2011 @ 12:55pm

    Re: Re: Ratings Agencies

    and will eventually succeed.

    reply to this | link to this | view in thread ]

  21. icon
    The Devil's Coachman (profile), 19 Aug 2011 @ 1:04pm

    Re: The US Govt Has No RIght To Investigate Standard & Poor’s

    Wow! The "Invisible Hand of the Market"! You mean the same invisible hand that somehow allows and perpetuates the establishment of corporate collusion and connivance that is regularly presented to the vapid consumers and blind regulators as competition? As in all the banks getting on the Additional Fee Generation bandwagon for things like debit cards, checks, etc , where when they all do it at the same time, the consumer has no realistic recourse because there is no real competition? That Invisible Hand? Oh, I see now. Thank you for bringing forth this most excellent point. I guess that same Invisible Hand permitted them to rate all the pre-housing bust CDO crap as just as good as gold. Yeah, that Invisible Hand. Uh-huh. OK.

    reply to this | link to this | view in thread ]

  22. identicon
    Mr. Oizo, 20 Aug 2011 @ 10:41am


    Or maybe, they _had_ to come clean in their ratings due to the investigation and the only thing they could do was come up with an AA rating.

    reply to this | link to this | view in thread ]

  23. identicon
    Pogo, 9 Sep 2011 @ 4:22am


    Since S&P offered its draft to White House for edit before release, it may be that long on-going investigations of the Justice Department had a motivational effect on S&P management.

    If management is venal enough to prostitute the company product for Angelo Mozillo,then management may be venal enough to be responsive Justice dept interest and to the administration's concern about the sudden GOP mania for national bankruptcy.

    reply to this | link to this | view in thread ]

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