S & P Under Investigation – Conflict of Interest??

Posted: August 18, 2011 in Current Events

Here is an interesting turn of events.  It seems that the S & P rating agency was under investigation by the U.S. Department f Justice when it cut the country’s AAA credit rating.  This raises all kinds of questions.  The investigation is looking at the company’s mortgage ratings before and during the economic crisis, claiming that agents doing the rating do not act independently of business concerns.

From HP:

During the boom years, S.& P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.

The Securities and Exchange Commission has also been investigating possible wrongdoing at S.& P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.

Does that undermine their re-evaluation of the U.S. credit rating?  Well, yes.  If their rating agents are not objective, the fact that they were being investigated may have acted as some small motivation in their taking the negative action.  It also begs the question of the competence of the rating agency, over all.

Might the investigation be a result of the lowered credit rating?  No, because the investigation was started well before the recent debt crisis, so probably can’t be viewed as a revenge or face saving tactic on the part of the Justice Department.  But that’s not to say that the investigation might be pursued with a little more enthusiasm now that they have something to prove.

It’s a mess, and a situation where objectivity is going to be very difficult to discern.  A ratings company which is able to rate the agency which is in fact investigating the rating company’s objectivity in rating.  I smell something fishy.

Who rates the raters?

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