According to a NY Times article, the Justice Department is investigating whether or not there was anything improper about the ratings given to mortgage securities by Standard & Poor’s prior to the real estate meltdown.  As you’ll remember, the strong S & P ratings helped drive investor confidence in what turned out to be securities with terribly inflated values. 

The investigation actually started several months ago, prior to the U.S. credit rating getting whacked by S & P earlier this month.  But the credit downgrade added fuel to the fire as many questioned the calculations S & P used to determine our debt.  So if they miscalculated our national debt, could Standard & Poor’s have possibly made an error or two when rating mortgage securities in 2004 – 2006?  Or were their calculations driven by business motives rather than independent analysis?

The Justice Department investigation involves instances where it appears that some of the company’s analysts wanted to award lower ratings to some of the mortgage bonds, but were over-ruled by their business managers.  If the government finds enough evidence to suggest wrong-doing they will likely file a civil case again Standard & Poor’s.  It is not clear at this time if the investigation also involves the other two major rating agencies, Moody’s and Fitch.  Investigations have also been initiated by the SEC.

Now, I’m no Economics wiz, but it seems pretty obvious to me that if the S & P ratings of all of those subprime mortgage securities had been accurate and really were as risk-free and strong as they indicated, we wouldn’t be in this pickle now, would we?  By awarding troubled mortgage loans their highest ratings S & P reaped huge profits and contributed to the devastation of the real estate market and our economy.  How can a company be so irresponsible and yet still retain so much authority and power?  It would somehow be refreshing, (albeit unlikely), that Standard & Poor’s actually have to face some negative consequences for their apparent greed.

Advertisement