The Justice Department is allegedly investigating the credit rating agency Standard & Poor’s for its ratings of mortgage related securities. S&P, along with rating agencies Moody’s and Fitch, have been widely blamed for helping to inflate the housing bubble that spurred the financial crisis. It is hard to imagine that the investigation is tied to Standard & Poor’s downgrading the credit rating of the United States to double-A plus.
We are heading down the slippery slope of deterioration. America’s underbelly is being exposed and word is out that since the downgrade of American debt, counties, states and corporations are dropping S&P as raters of their debt.
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.
Companies and some countries _ but not the United States _ pay the credit ratings agencies to receive a rating, the financial market’s version of a seal of approval. Before the financial crisis, banks shopped around to make sure rating agencies would award favourable ratings before agreeing to work with them. These banks paid as much as $100,000 for ratings on mortgage bond deals, according to the Financial Crisis Inquiry Commission, the Times said.
This business model is riddled with conflicts of interest since ratings agencies might make their grades more positive to please their customers. Now that America has been downgraded, those same customers will now drop S&P. The business is dead and can no longer be relied upon. Wake up America!