Schneiderman probe: Another chink in the armour of credit rating agencies?

With the $5 billion civil suit against Standard & Poor’s Rating Services putting a target on the credit rating agency’s back, the door may have been pushed open for inspection of rival credit rating agencies.

New York Attorney General Eric Schneiderman opened up another can of worms in the investor market as he subpoenaed S&P, as well as requested information from Fitch Ratings and Moody’s Investors Service, the AG’s office confirmed with HousingWire on Friday. 

John Taylor, CEO of the National Community Reinvestment Coalition, predicted the latest DOJ suit against S&P will prompt other actions against the big three rating giants.

“I think all three rating agencies are probably being investigated – the other two as well,” Taylor said this week. “I don’t see any reason why there would not be a similar complaint filed against Moody’s and Fitch, they practiced the same thing.”

On a similar note, the Association of Financial Guaranty Insurers told HousingWire that they strongly support the establishment of regulation as well as oversight of the credit ratings agencies. 

“Rules requiring detailed rating agency transparency of both their rating methodology and process, based on quantifiable standards, are essential to ensure the appropriate functioning of our critical capital markets and the economy. Further, rating agencies that deviate from established standards and procedures should be subject to stiff penalties,” they said. 

The issues being examined by all three credit rating agencies deal with ratings issued on residential mortgage-backed securitization deals and CDOs during the pre-financial crisis, a person familiar with the matter told the Wall Street Journal. 

Partner Manal Mehta at Sunesis Capital told HousingWire that Schneiderman’s investigations into the credit ratings agencies validate the allegations bond insurers have been making for years.

“The investigation into the conduct of rating agencies begs a very fundamental question – what role did the banks play in originating and securitizing defective mortgages,” Mehta said.

He added, “After all, it would have been impossible for the rating agencies to defraud investors if they weren’t rating defective products in the first place.” 

The Justice Department sued S&P and its parent company McGraw-Hill over issues stemming from collateralized debt obligations rated by S&P between March and October 2007. 

Analysts also suggested that Moody’s and Fitch could also face additional scrutiny for pre-crisis ratings of RMBS and CDOs. However, neither of the two credit rating agencies were named in the DOJ suit. 

U.S. Attorney General Eric Holder told HousingWire earlier this week that after an investigation into S&P documents, the DOJ concluded that, in reality, the ratings were soiled by conflicts of interest and S&P was primarily “driven by a desire to increase its profits and market share to favor the interests of issuers over investors,” Holder said in a statement.

Depending on what Schneiderman receives through the requested information and the subpoena, the New York attorney general may look at the rating agencies conduct since the crisis, the Wall Street Journal reported.

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