It’s old, if dismaying, news that “they got away with it”: The big banks, shadow bankers and other Wall Street boyz that brought on the worst financial collapse since the Great Depression. But one group of suspects might still face some peril. The Securities and Exchange Commission is reportedly investigating how Standard & Poor’s handled a rating. According to the Wall Street Journal, “On that deal, S&P had initially agreed in July 2011 to evaluate a $1.5 billion security made up of commercial real-estate loans but announced at the 11th hour that it was withdrawing its ratings. The SEC is investigating whether the circumstances around that decision involved violations of securities laws….”
S&P said it had found “discrepancies” in the standards its analysts used, but they were still within what the company considered acceptable. Nevertheless, the sudden shift spooked the market and held up the deal for weeks. The SEC had already been evaluating S&P, and now this deal has apparently drawn special scrutiny. S&P, the largest ratings service, stayed out of the commercial mortgage-backed securities market for a year. Bloomberg writes, “Moody’s Investors Service, the second-largest credit rater, criticized its competitor, saying the underlying loans in the securities did not ‘merit’ the ranking.”
This sounds like a complex, limited case and it will be thin broth for those who see the ratings agencies as complicit in the disaster. These firms are supposed to provide objective ratings of securities, providing investors with disinterested information and the market with a check against frauds and bubbles.
The trouble is that they are anything but disinterested. S&P, for example, is a subsidiary of McGraw Hill Financial, a publicly traded company. All the ratings agencies are in competition and under pressure to get business and grow. It is no coincidence that they tended to give top ratings to the mortgage-backed securities that were at the heart of the financial collapse. This disaster’s biggest trigger is arguably a breakdown of the watchdog system, including regulators that were captured by the big financial firms and the ratings agencies. It was a bigger replay of the 2000-2001 meltdown of such firms as Enron because the big accounting outfits weren’t doing there job.
The SEC has a new boss, Mary Jo White, who was a U.S. Attorney going after financial frauds — but also head of the litigation department of Debevoise & Plimpton, one of the most prestigious corporate law firms in the world. Will she make the lapdog bite? We will get a good idea if S&P, if it is found guilty in this investigation, is forced to admit guilt instead of merely paying a fine. That might send a signal that the ratings agencies need to return to their essential role.
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Today’s Econ Haiku:
Bank profits are up
Squint hard and you can see them