Justice Department Questions S&P Credit Ratings

Is the United States Department of Justice (DOJ) trying to bring down the S&P credit rating agency as a retaliatory measure? Maybe they are and maybe they aren't but the timing of the news about an official investigation of the agency is certainly curious, especially in light of the recent downgrading of the United States from AAA status. Anonymous leaks claim that the investigation began way before the downgrade, but went on to say that DOJ efforts have intensified in recent days.

The issue at hand actually has nothing to do with THAT downgrade. Instead, investigators are probing why S&P didn't downgrade garbage mortgage-backed securities like Fannie Mae and Freddie Mac after it became obvious they were toxic assets. S&P analysts allegedly act independently of any business concerns the agency might have, and are supposed to be an objective opinion of creditworthiness around the world.

When one of the big credit rating agencies (Moody's and Fitch are the other two) decides to lower a company's or nation's credit rating, it's a big deal, and investors stand to lose a lot of money. S&P employee emails have come to light that imply S&P administrators were telling analysts not to downgrade junk mortgage securities because of the high cost to investors. If it

turns out that the credit giant allowed its credit rating decisions to be influenced by business concerns, the hooey is going to hit the fan big time, perhaps calling into question the agency's ability to provide an objective opinion on anything.

The obvious question is whether or not the fallout of such a finding would call into question America's credit downgrade and whether it was a result of legitimate concerns about the national ability to pay its debt or simply a subjective fit. Not that one has anything to do with the other – does it? But the timing of the DOJ investigation coming to light is simply too delicious to ignore. So far, coverage has indicated that we're dealing with a Washington and not a Wall Street story.

The larger question of how these ratings agencies were able to gain so much power over global economies is addressed in a well written piece by Lori Widmor, called “The Future of Ratings.” to anyone tuned into the national debate over our economic future, it's worth the time to read.

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The American Monetary Association Team

American Monetary Association

(Flickr / USDAgov)

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