It’s been a really rough week for Standard & Poor’s. As we noted Wednesday, the Securities and Exchange Commission is “reviewing” the rating agencies’ recent decision to downgrade the federal government’s credit rating, which is totally inconsistent with actual economic indicators of the country’s ability to pay its debt. The Senate Banking Committee is “gathering information” into that decision as well.
Yesterday, the New York Times reported that the Department of Justice has been probing Standard & Poor’s for its role in blessing toxic mortgage-backed securities in the years leading to the financial crisis those instruments ultimately caused. The investigation could “accelerate the shift away from the traditional ratings system,” the Times notes.
The Justice probe focuses on whether managers at Standard & Poor’s deliberately kept high ratings for mortgage-backed securities, despite the advice of some of the company’s analysts, in order to preserve income from the very trading firms that trafficked in the dangerous tranches. According to the Times, investigators are questioning witnesses who might have heard Standard & Poor’s managing director David Tesher warned employees: “Don’t kill the golden goose.”
Senator Al Franken wrote an opinion piece for CNN today highlighting another bit of evidence: a 2006 e-mail from a Standard & Poor’s official, which said: “Let’s hope we are all wealthy and retired by the time this house of cards falters.”
As experts are trying to piece together why Standard & Poor’s made a clearly political, and clearly not economic, decision to downgrade the federal debt, it’s crucially important to include the context of these ongoing investigations.
While nobody else knows what is driving Standard & Poor’s to act, it is easy to see how it might believe the downgrade helps them—first, because while under attack for being blind to the mortgage-backed securities, they can now appear tough-minded about a debt crisis, which while again isn’t economically present, is taken seriously by many DC policymakers.
Moreover, by issuing the downgrade and striking a blow against the administration, Standard & Poor’s may be hoping to paint any ongoing investigations as retribution. If that’s the strategy, it’s starting to work. The lead of an ABC News story on the Justice investigation, for example, asks if the downgrade has made Standard & Poor’s “a lightning rod for critics and regulators.” The Washington Post similarly characterizes the investigation as “likely to add to the political firestorm created by the downgrade.”