The Justice Department late Monday filed civil fraud charges against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck. ...NYT
The dirty dealing Standard & Poor's is accused of in what seems to be the Justice Department's dogged and complicated attack on Wall Street has some interesting history. Gotta wonder whether part of what's going here is righteous wrath on the part of DOJ. They've been trying to nail the mortgage dealers and have taken a lot of criticism for not finding an effective and foolproof way of doing so.
The case against S.& P. focuses on about 40 collateralized debt obligations, or C.D.O.’s, an exotic type of security made up of bundles of mortgage bonds, which in turn were composed of individual home loans. The securities were created at the height of the housing boom. S.& P. was paid fees of about $13 million for rating them.
Prosecutors have uncovered troves of e-mails written by S.& P. employees, some of them expressing strong concern about the way such securities were being rated. The firm gave the government more than 20 million pages of e-mails as part of its investigation, the people with knowledge of the process said.
Since the financial crisis in 2008, the ratings agencies’ business practices have been widely criticized and questions have been raised as to whether independent analysis was corrupted by Wall Street’s push for profits.
A Senate investigation made public in 2010 found that S.& P. and Moody’s used inaccurate rating models from 2004 to 2007 that failed to predict how high-risk mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006. ...NYT
And speaking of ratings, S&P went after the administration in 2011, blaming Treasury for "a numerical error in a draft of its downgrade report that overstated the deficit over 10 years by $2 trillion." S&P then downgraded US bonds from AAA to AA ratings.
S&P has angered government officials with aggressive warnings during the past few months of a potential downgrade. S&P corrected its draft report Friday after Treasury raised concerns about the math.
Over the past few months, the multiple warnings from S&P have not worried government bond markets. What’s more, the two other major credit rating companies, Moody’s Investors Service and Fitch Ratings, have said they would preserve the nation’s AAA rating for now.
S&P’s downgrade was as much a political critique as a financial conclusion. ...WaPo, 2011
And that downgrade may have been a move driven by resentment on the part of S&P which has been under investigation for its role in mortgage fraud since 2010.
Neil Barofsky, the former inspector general for the Troubled Asset Relief Program, said the Justice Department move against S&P looked like an effort to get "some measure of accountability" for the financial crisis, which was "something that's been really lacking across the board."
The lawsuit, filed in Los Angeles federal court, is the culmination of a government investigation that dates back to at least 2010, former S&P analysts have told the Journal.
In 2011, S&P, Moody's and the Fitch Ratings unit of Fimalac SA and Hearst Corp. were accused by a Senate committee of giving overly rosy ratings to CDOs and then causing an "economic earthquake" by downgrading hundreds of the bonds when the scale of the housing collapse became clear.
S&P suggested Monday it was being unfairly singled out. ...Wall Street Journal
So why not go after the whole nasty crowd on Wall Street who are no less guilty than S&P?
... Why is it now that the Justice Department is going after S&P–a credit rating agency that is surely to share some of the blame–but certainly not all of it.
“This is part of the federal government’s continued effort to “round up” anybody and everybody allegedly culpable in the financial crisis,” says Anthony Sabino a professor at St. John’s University‘s Peter J. Tobin College of Business.
Does that mean Moody’s is next? S&P argues that it wasn’t alone in giving insufficient ratings to toxic mortgage assets, thus shining the light on its peers like Moody’s and Fitch. BTIG Research expects as much saying the agencies including Moody’s have been so able to avoid much litigation but that could change as the U.S. government feels more pressure to prosecute. ...Forbes
Aw, jeez! Go back and reread Bleak House. Or Oliver Twist. The law is slow, imponderable. "The law is a ass." But maybe DOJ will get at least some of the perps, some day.