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U.S. debt rating flap adds to S&P's woes

The credit-rating firm was already under intense scrutiny for giving AAA ratings to many securities backed by subprime mortgages, which are widely blamed for the financial crisis.

August 19, 2011|Jim Puzzanghera

WASHINGTON — The backlash against Standard & Poor's for downgrading the U.S. credit rating adds to the company's problems in the nation's capital, where it faces investigations for its role in fueling the financial crisis with faulty assessments of mortgage-backed securities.

S&P and the other credit-rating firms are widely believed to have enabled the near market meltdown by giving AAA ratings to many securities backed by risky subprime mortgages.

The Financial Crisis Inquiry Commission called the credit-rating companies "essential cogs in the wheel of financial destruction." And a report by a Senate subcommittee criticized S&P and Moody's Investors Service for giving overly optimistic assessments on tens of thousands of high-risk securities so it wouldn't lose the business of financial firms that paid for the ratings.

The Justice Department is investigating whether rating decisions by S&P analysts had been overruled by other company managers who were concerned about a loss of business, the New York Times reported. The Securities and Exchange Commission also is investigating S&P's activities leading up to the financial crisis, the newspaper reported.

Justice Department and SEC officials would not confirm the investigations Thursday.

An S&P spokesman would not comment on the report. The company has said in SEC filings that it has received "numerous subpoenas and other government inquiries" about its ratings of mortgage-backed securities.

"We have cooperated and will continue to cooperate with these requests," company spokesman Ed Sweeney said Thursday.

The investigations began before S&P this month downgraded its AAA credit rating for U.S. debt. That move sparked intense criticism of S&P from many politicians, Wall Street executives and local government officials, as well as ridicule from late-night comics.

S&P's downgrade came after government officials argued privately with S&P analysts about the company's financial analysis. That dispute has raised questions in Washington about the company's credibility, particularly after the other two leading firms, Moody's and Fitch Ratings, reaffirmed their AAA ratings for the nation.

The Senate Banking Committee is gathering information about the downgrade and considering whether to launch an investigation or hold hearings.

An investigation by the Senate's Permanent Subcommittee on Investigations found that ratings companies engaged in "reckless actions and significant conflicts of interest ... that contributed to the financial crisis," said Sen. Carl Levin (D-Mich.), the chairman.

"It is totally appropriate for U.S. law enforcement agencies to review that sad record," he said Thursday.

The subcommittee found that during the housing boom, S&P charged banks $40,000 to $135,000 to rate their mortgage-backed securities and as much as $750,000 to rate collateralized debt obligations that repackaged those securities.

Rep. Brad Sherman (D-Sherman Oaks), an outspoken critic of the performance of rating companies during the housing boom, said the U.S. downgrade should not influence investigations into the past practices.

But, noting that the government doesn't pay for its ratings, he said S&P might have used the U.S. downgrade to show it had changed its ways. "They graded tough the only student in the class who wasn't paying them," he said.

S&P and other ratings companies said they have toughened their policies.

Lawrence J. White, an expert on credit-rating companies at New York University, said S&P, Moody's and Fitch "really screwed up badly" on mortgage-related securities.

"Given all the heightened attention" after the S&P downgrade, he said, "it doesn't come as a big surprise that there would be further investigation into what went wrong."

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