Standard and Poor’s under investigation

According to the New York Times – the investigation is examining whether Standard and Poor’s made mistakes in rating dozens of mortgage securities in the run up to the global financial crisis – triggered because overxposed banks had loaned billions in toxic debts.

Sources at the Justice Department told the paper that they were looking into allegations that S&P analysts wanted to give lower ratings to mortgage bonds – but may have been overruled by business managers. Another investigation is being considered by the Securities and Exchange Commission – which could be examining the other two leading agencies, Fitch and Moody’s – as well. The SEC hasn’t given any official comment.

This isn’t just a political issue: this is a multi-million pound industry. At the height of the credit boom ratings agencies made huge profits by giving top grades to bundles of troubled mortgage loans – as the New York Times put it: “making them look less risky and thus more valuable”. They’ve been heavily criticised for failing to forsee the steep decline in the housing market and the lending squeeze – which wreaked havoc on the economy… and have since admitted to some shortcomings. S&P told the Financial Mail – “We recognise that a number of the assumptions we used in our analysis of many recent American consolidated debt obligations did not hold up”.

The Justice Department probe is said to have begun well before the debt rating row – but it’ll undoubtedly provide fresh ammunition to those furious with S&P over its decision to downgrade America’s long term debt – especially since neither Fitch nor Moody’s – followed suit. A public relations battle is now raging after the White House accused S&P of getting it’s figures wrong – by $2 trillion. It all remains to be seen how long the credit ratings agencies continue to wield such power over the world’s richest economies.