Reverse

Investigation Focuses on S&P MBS Ratings

The U.S. Justice department is looking into actions by Standard & Poor related to ratings of mortgage backed securities (MBS) in the lead up to the financial crisis.

According to an article in The New York Times, two people that stated they were interviewed by Justice Department officials and other that was briefed on the interviews said the agency is looking into whether the nation's largest credit ratings agency improperly rated mortgage securities prior to the mortgage financial meltdown.

Although the report states that the investigation began prior to S&P's decision to cut the credit rating of the United States from AAA, that decision is likely to increase motivation for more in depth inquiries of the organization.  Since the announcement, government officials have questioned the rationale behind the decision and the agency's secretive process.

The inquiry, the article suggest, is focused on situations where S&P business managers may have overruled company analysts recommendations to lower credit ratings on mortgage bonds.  Questions surround S&P's intent in placing high ratings on MBS that made trouble mortgage loans appear less risky with higher returns.  Reports have looked into whether S&P acted truly as an independent rating agency or were more driven by a focus on generating profit.

Another source told The New York Times that the Securities and Exchange commission has also been looking into actions by S&P, in addition to other credit rating agencies, Moody's and Fitch Ratings.

Should the investigations lead to actions or settlements involving the credit rating agencies, it weaken their importance in the eyes of investors.  The Dodd-Frank act includes provisions that seek to decrease the emphasis on ratings, although specifics on new regulations have yet to be determined.  Companies currently pay the rating agencies to evaluate their investment vehicles and issue a rating.  If the importance of ratings by these agencies were decreased, then along with it would companies impetus to pay them for their services.  This might lead to a business model shift where investors pay for ratings evaluations instead of the companies issuing the securities.

Most Popular Articles

3d rendering of a row of luxury townhouses along a street

Log In

Forgot Password?

Don't have an account? Please