August 18, 2011

Standard and Poor's Under Investigation

The U.S. Justice Department is now investigating the Standard and Poor's rating agency for improperly rating dozens of Mortgage Backed Securities with very high ratings, after many of those investment turned out to be worthless. I find the timing interesting because it seems like Americans in general are aware of the idea that the rating agencies contributed to the Recession that started in 2008. By giving many of these investment securities a top rating, many investors were duped into purchasing them, and insurance companies into insuring them. When the value of these securities imploded, many were left holding worthless bonds. Why is it now that the Justice Department seems to be making a public case that an investigation is being conducting against the agency? Well of course, I think the answer seems to be pretty apparent: The U.S. is not happy with the recent Downgrade of the nation's debt

and has decided to strike back at the rating agency. Although I welcome the Departments inquiry into the ratings handed out that contributed to the crisis, it should have been conducted whether the Nation was downgraded or not! According to the NY Times article Justice Inquiry is Said to Focus on S&P Ratings, the Justice Department began the investigation before the Nations triple AAA credit rating was lowered to AA+. If that were true, this is the first time I've heard about it and I read several newspapers each day! This seems like a clear case of getting some revenge if you ask me for my first response to this story.

Were S&P Ratings Driven by Profit?

In the investigation itself, Justice Department officials are focusing on times when analyst working for the company wanted to rate specific mortgage bonds lower, only to be ruled over by other S&P managers. Standard and Poor's made huge profits during the recent boom years (2002-2006) handing out the highest possible ratings on bonds that were backed by pooled mortgage loans, making them appear more valuable than they turned out to be. Many companies and countries (excluding the U.S.) pay the rating agency to provide ratings for a variety of securities. Follow the link to view the Different Levels of the Standard and Poor's Ratings.

It really makes me wonder if the U.S. paid for ratings, whether they still would have been downgraded! It was reported before the recent crisis, some banks paid Standard and Poor's up to $100,000 to get a rating from them. Obviously this seems like a clear example of a conflict of interest! Paying to get your rating most likely meant your securities being rated were going get favorable treatment. I would like to point out that this is not the first time rating agencies in general, have been accused of improper behavior that heavily contributed to a recession or even a market crash. The famous Stock Trader named Jesse Livermore, gave a statement to the Newspapers in 1929 to defend himself against accusers who were directly blaming him for causing the 1929 Market Crash. He said, "It is very foolish to think that an individual or combination of individuals could artificially bring about a decline in the stock market in a country so large and prosperous as the United States, What happened during the last few weeks is the inevitable result of a long period of continuous rank manipulation of many stock issues causing their prices to rise many times above their actual worth, based on real earnings and yield returns."

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