Timing of DOJ Probe Into S&P Ratings Service Is Suspicious


Did the U.S. Department of Justice decide to investigate Standard & Poor’s investment rating service in retaliation for S&P’s decision to strip the United States of its longstanding “AAA” rating?

The New York Times reported earlier this week about the existence of an ongoing probe of Standard & Poor’s that is focusing on whether top managers there chose to overrule their subordinates during the mortgage crisis and to give inappropriately high ratings to dubious mortgage-backed securities such as collateralized debt obligations (CDOs).

Although S&P has often successfully invoked the First Amendment in response to previous investigations of its ratings, it might find that a difficult defense to raise in this DOJ investigation. The probe reportedly centers on conflict-of-interest issues. Currently, ratings agencies like S&P make money by charging fees to the companies that put together and sell the investments, not by charging investors. The concern is that S&P might have handed out high ratings to please their customers, thus leaving investors under the false impression that the mortgage-backed securities were sound.

According to the Times, the investigation is civil rather than criminal. Still, even a civil complaint against S&P could be very damaging to it and could permanently change the way that ratings agencies on Wall Street do business.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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