U.S. Government Swears It Was Investigating S&P Before the Downgrade

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Photo: STAN HONDA/AFP/Getty Images

Credit ratings agency Standard & Poor's is under investigation by the Justice Department for their shoddy mortgage ratings in the lead-up to the financial crisis. The Feds say the investigation started prior to the agency's downgrade of the U.S. government's AAA credit rating. Still, even the New York Times has to admit that the timing "is likely to add fuel to the political firestorm" that occurred after a near default led to a much-criticized downgrade from S&P. The Times says it's "unclear" whether the investigation includes the other major ratings agencies, Moody's and Fitch, who pursued many of the same disastrous practices while the mortgage securities bubble was inflating.

For now, it's just S&P feeling the heat. The Justice Department wants to know if analysts who were considering giving lower ratings on mortgage bonds were overruled by the company's business managers. During the investigation, employees have been asked if they ever heard the phrase “Don’t kill the golden goose,” used in reference to mortgage securities.

The government is pursuing a civil case, but prosecution could have very real consequences for the ratings system as we know it:


[T]he ratings agencies could be forced to stop making their money off the entities they rate and instead charge investors who use the ratings. The current business model, critics say, is riddled with conflicts of interest, since ratings agencies might make their grades more positive to please their customers.

Consider the golden goose threatened, at least.

U.S. Inquiry Eyes S.&P. Ratings of Mortgages [NYT]