Is the U.S. Getting Revenge on S&P with an Investigation Over Mortgage Securities Ratings?

Standard & Poor’s (NYSE:MHP) is under investigation by the U.S. Department of Justice for its practice of rating mortgage securities in the years leading up to the financial crisis. The investigation, which began before S&P downgraded the U.S. credit rating, will be answering the question of whether S&P business managers pressured analysts to assign higher ratings to mortgages than the data showed them to deserve. No news yet on whether the other two ratings agencies, Moody’s (NYSE:MCO) and Fitch, are also under investigation. The timeliness of the DOJ’s action definitely appears like revenge in what has been a huge global power play.

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Investors rely upon ratings from Standard & Poor’s and the other two ratings agencies when purchasing sovereign and corporate debt and other financial products. Both companies and countries rely on positive ratings in order to stir up investors. Many pay the agencies in order to receive a rating. The United States government even gave the agencies a stamp of approval, issuing rules saying that banks, mutual funds, and individuals could rely upon an AAA rating.

If Standard & Poor’s is found to have misled investors by knowingly assigning inflated ratings, it could spell the end of the ratings system as we know it. The Dodd-Frank financial reform act passed last year already sought to remove some of the emphasis on ratings, but so far, it has been unclear how that reform would work.

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Standard & Poor’s is also under investigation by the U.S. Securities and Exchange Commission, which is reviewing the agency’s decision to downgrade the U.S. credit rating from AAA to AA+ on August 6, to make sure the agency made an informed and fair assessment of U.S. debt. Committees in Congress may also be discussing the downgrade and possible reforms to the ratings industry.