Standard & Poor’s, a popular US based financial services company, has recently fallen under accusations by the US government of hiking ratings on mortgage expenditures in order to raise their own bottom line.
Charges were filed Monday in Federal Court, and the Justice Department stated that Standard & Poor’s allowed for high ratings in mortgage backed bonds that in turn fell, regardless of the fact that Standard & Poor’s was aware that these securities were a risk. The Justice Department stated that the company minimized the risks in order to bring in more business through the banking institutions.
Rating services are taking a lot of blame for their contributions to the economic crisis that has caused literally the worst recession since the Great Depression. By doling out high ratings and minimizing the idea of risk to the investors on pools of mortgages and various debt that was put together by large banking institution and hedge funds, investors that may have questioned the risk at one point were fooled into being overconfident about their purchases.
Certain investors are only allowed to purchase investments that have been rated high by credit agencies. S& P hiked up the ratings, in turn allowing for banks to easily move these high risk mortgages right down the line.
In 2007, when the real estate market first started to turn, certain rating agencies states that a variety of mortgages that were obtained during the real estate bubble were definitely more risky than their ratings made people believe. The ratings were lowered on approximately $2 trillion worth, and this in turn spread fear, which eventually turned into an all out crisis.
Standard & Poor’s has completely denied fault on their part, stating that additionally, the US Government also fell short on predicting the subprime mortgage crisis.
The lawsuit is stating that Standard & Poor’s was far more interested in generating revenue than offering precise ratings. It also states that S& P took their time in making updates to their ratings models, and hurried through the entire rating process, handing out high ratings regardless of the fact that they were knowledgeable that the subprime mortgage market was struggling. The deception went as far as at one point in 2007, an analyst at the firm sent out a video starring himself-dancing and singing a comedic song that focused on the failing market, all while his coworkers watched and laughed.
Lance Roberts, the Chief Economist of Streettalk Advisors stated that the lawsuit was “about three years too late,” due to the fact that the government took their time in pursuing the acts of the agency. He stated, “The government’s just now getting around to filing a lawsuit?” It seems disingenuous to me. Why is there actually no regulation that occurs at the front end?”
Financial ratings agencies like Standard & Poor’s are very important in the overall narrative of the financial crisis. When financial institutions are looking to sell mortgages that have been packaged into securities to investors, they trust that the ratings agency will be accurate. A large amount of securities that consisted of high risk subprime mortgages got very high ratings which in turn allowed for extremely conservative investors, including pension funds, an inflated sense of confidence when purchasing them. When borrowers failed to make timely payments and defaulted on their loans, the investors lost a great deal of money.
Morning trading reports for Tuesday show that McGraw-Hill shares dropped $2.65, or 5.3 percent, to $47.65 after falling approximately 14 percent on Monday, in the anticipation that a lawsuit was on the horizon, and the parent of Moody’s Investors Service, Shares of Moody’s Corp., another big name in rating agencies, lost $1.05 or 2.2 percent to $48.40.