It turns out that the Justice Department is not only concerned with Standard and Poor’s but the entire credit rating agency industry, it appears. The reported investigation into the ratings of mortgage backed securities during the housing bubble is centered on S&P, but not limited to them:
The probe by lawyers in the Justice Department’s civil division appears to be centered on the actions of S&P, though that could change as the investigation proceeds, this person said.
The SEC for months has been looking closely at the conduct of S&P and reviewing the role played by Moody’s Investors Service, owned by Moody’s Corp., in relation to at least two mortgage-bond deals, according to people familiar with the matter.
SEC officials are focusing on whether some rating firms committed fraud by failing to do enough research to adequately assess and rate pools of subprime mortgages and other loans packaged into mortgage bonds. An SEC spokesman declined to comment.
Justice Department lawyers have joined that probe, said the U.S. official familiar with the matter, a common move in such sprawling investigations. Their cooperation began before S&P announced on Aug. 5 the downgrade of its rating on long-term U.S. government debt, the official added.
Fitch Ratings, the other of the big three rating agencies, claims that they are “not aware of any government investigations.”
We already have material in the public domain and whistleblowers who have come forward on this, probably enough to convict both Moody’s and S&P. The NYT said this was a civil investigation, although with DoJ involved the prospect of a criminal investigation is there, at least in theory.
The bigger issue is the overhaul of the entire rating agency structure. Sen. Al Franken (D-MN), whose rating agency amendment passed in the Dodd-Frank Act, released this statement yesterday, and pay careful attention to it:
“While I welcome the news that the Justice Department has launched an investigation into S&P, I imagine they’ll conclude what a lot of us have long known: S&P made record profits by knowingly handing out sterling credit ratings to complete junk,” said Sen. Franken. “If the bipartisan provision I authored in the Wall Street reform law is implemented in full it will prevent the inherent conflict of interest currently plaguing our credit rating system and jeopardizing the stability of our markets. Until we rein in the corruption of the credit rating industry, we are just asking for another financial meltdown.”
Sen. Franken’s Restore Integrity Credit Rating Amendment was introduced with Sen. Roger Wicker (R-Miss.) and passed into law with the Wall Street reform bill. Instead of allowing banks to choose which credit rating agencies will rate the quality of their bonds, Sen. Franken’s provision creates a board, overseen by the Securities and Exchange Commission (SEC), which will assign credit rating agencies to issue an initial rating. This would end the inherent conflict of interest in Wall Street’s current pay-to-play credit rating system by preventing agencies from giving away undeserved top ratings to countless sub-par financial products in order to attract business. The SEC is currently studying the issue. The law requires that the SEC implement Sen. Franken’s provision, or a similar alternative, if the study reveals that the conflicts of interest continue to put investors and the public at risk.
I’ve highlighted the key section. The law is pretty clear on this. If conflict if interest is found, the SEC must implement some provision to end the issuer-pays model. The very fact of an investigation proves that conflict of interest still exists. So in theory, the issuer-pays model should be done for.
That’s clearly what Franken is pushing for, and it should be the focus of advocates as well. We cannot have S&P having the ability to hold hostage both the federal government and state and local governments while keeping a clear financial relationship to Wall Street intact. The implications for any meaningful legislation are obvious.




27 Comments

Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About FDL News Desk
I want to believe that the DOJ investigation will be vigorous and thorough and, if warranted, indictments will follow. I want to believe Franken’s RICRA will correct some of the worst things that have been going on. But, the SEC is involved in all this, and Taibbi’s RS article indicates that the SEC is a key player in the corruption. Arrrrgh.
Oh, and thanks for this, David.
Remember when Bill Black wrote his article, The Two Documents Everyone Should Read to Better Understand the Crisis, in February 2009? The two documents were (1) an S&P senior manager’s e-mail to a credit rater who wanted to examine loan files:
And (2) a report by Fitch:
As for DOJ, I’m recalling Black’s interview with Harry Shearer, where he described how the FBI had been pretty much stopped from within from going after mortgage fraud:
And now Eric Holder’s finally going to do better? Seriously? The first thing that comes to my mind is that they’ll put up a sham case to spike the chance of a seriously prosecuted case later. A little fine, an ex-AG corporate monitor, just a little dirt swept under the rug…all cleaned up.
Every single agency and official was complicit in this. It is as if it was intentional robbery of the citizens and economic downfall of the country.
The DOJ is partner in the crimes and will do nothing. The FBI has been sidetracked and purposely sent to work on other projects.
Bill Black. The dude is my Sensei.
http://open.salon.com/blog/bobbyg/2009/02/25/investigate_wall_street
Sadly, I agree that Holder et al are not gonna do anything substantive.
I heart my junior senator.
Yep. They will trot out another Madoff type to be an example and that’s the end of the story until TBTF needs another bailout.
You are to be congratulated on having a Senator with courage. I have Durbin and he has turned out to be a turncoat.
What really teed me off was when the deal was complete on the debt crisis, he walked over and shook Mitch McConnell’s hand. Anything he says or does after that is never going to be good enough for my vote in the future.
Feh. What do you all bet that absolutely fucking nothing comes of all this?
Holder, Geithner and Obama investigate Wall St?
Don’t make me laugh!
Go Al…
Yeah, I think that notion was dispositively refuted yesterday during the Gretchen Mortgenson “Reckless Endangerment” book salon here.
I continue to mull over the stuff from that.
Unfortunately your junior senator relying on the SEC is a bit naive. That agency is already a victim of institutional capture. There is little evidence that the SEC is currently capable of or even willing to exercise effective oversight or regulatory actions.
Let the disappointment-in-chief appoint a commission with members chosen by Black and Elizabeth Warren to do the oversight. I don’t really trust many other people.
wow – 1000 FBI agents investigating the S&L crony corruption bubble of ronnie-bubble-raygun —-
no wonder the fascists have been working balls to the walls for decades to gut the government – I’m 51 and I was a cook in the 80′s, I KNEW stuff was rotten but I had no idea that we actually had a government that put 1000 g-men on the problem!
the good old days.
by the way – WHAT IS THE POINT of all these complicated complex financial shenanigans ??
I can understand that it is complicated and complex to travel to and from Mars in 3 days – hell – we can’t even do it at all!
to this simple mind, complex money stuff = screwing everyone. PROOF – you need 1000 feds to fix it! what a waste of national resources.
rmm.
“by the way – WHAT IS THE POINT of all these complicated complex financial shenanigans ??”
___
In a word, embezzlement.
Even in a negative-sum game there are winners.
If Franken is engaged in empty posturing, as it seems Elizabeth Warren, “running” as a Democrat in Massachusetts increasing appears to be, then matt, I imagine that the result, while disappointing over the “failure” of consequence, will result in a far more serious consequence for all who “game” the people’s hopes and reasonable expectation of meaninful change.
For “failure” will connote the emptiness of the gesture and the lie of the intent so clearly as to remove the last vestage of doubt – the corruption will be understood as total and the jig will be “up”.
Frankly, I think that the more likely outcome.
Just as I imagine that fewer than five members of Congress will personally read William Harrington’s letter, eigthy pages worth discussing his time at and “discoveries” about Moody’s and its managerial behaviors, sent to that body, to Congress …
Play-acting will avail the political class of nothing, any longer, whatever they might be led to believe. However hard they try to deceive.
DW
Thanks for the post. No offense intended, but wake me when something *really* happens and, you know, a substantial component of these various crooks & thieves are really held accountable and have substantive consequences… I might as well ask Rip van Winkle to move over bc it’s gonna be a long, dark night of sleeping.
As someone else indicated up above, the most one can expect is some Bernie Madoff-style scapegoat; someone really low on the totem pole, who’s not well connected enough and gets busted.
Ho-hum…. shove over there Rip, yer hawging the mattress!
Whoesale embezzlement, vb, re-taled again, and again, until total collapse.
And then, what have “they”?
Everything?
or
Nothing …?
Who will cheer them?
Who will loathe and detest them?
Who can imagine?
DW
He’s good enough, he’s smart enough, and doggone it, people like him.
Dday, thanks for this. I think the last two grafs of your quote from Franken’s press release were actually intended to be your comment on the release.
I like your angle on this, that “the issuer-pays model appears to be done for.” That could mean that S&P and Moody’s bet their companies, and lost. That could explain why McGraw Hill (owner of S&P) is considering major corporate restructuring at the board level. Its board may see the writing on the wall, that it’s time to cut S&P loose.
It will be important in assessing the gravity of the investigations to identify which law firms are repp’ing S&P. Specifically, did S&P hire any criminal defense firm(s), even though DOJ is ostensibly limiting its inquiry to its civil division? Also, has S&P disclosed any litigation budget for these investigations? (Answers may be in the 8-K, which I did not read yet.)
You mean this Justice Department? (Emphasis added.)
Holder is stuck in the banana republic mindset the same way that Condi, Rummy, et al were still fighting the cold war.
Fractal the rubber meets the road in the liability not the wrong doing. If investors can go after rating agencies then the raters and banks that issued the tranches secured by overrated mortgages they will lawyer up to get a creditors share of the loss.
This is sunshine on a cloudy day. If franken has sucess and it looks like he saw some of the crap in Dodd-Franks bill.
Dodd and Frank are implicated in conflict of interest with the mortgage industry. If franked who has the stones but not the stroke gets some help it might be the beggining of serious fraud control as the loers outnumber the winners a million to one in the great housing bubble crash that took down the global econ and brought us where we are today.
I ran across this earlier today, which points to even another conflict of interest over the S&P debt ratings:
There is more on McConnell’s family business interests in China, and Portman has been vocal on the subject of Chinese currency.
There is more information on all those involved, but I think I got the outline of the article here.
Rating agencies charge fees for rating issues. They have been trading favors for years. Pimco hedge, Newport Beach Ca, is rumored to have made billions shorting USA credit by buying short. That during the debt ceiling scam that brought us the 12 person Super Congress to cut the deficit and safety net programs.
Like a dog chasing it’s tail. They screwed the country and the people and they are gonna get away with it. The timing was perfect and we have a President who is complicate in the rip off and you think you are going to get justice. You are forever dreaming. Talk about not seeing the forest for trees, utter denial.
FYI, now Obama is frantically trying to get the New York AG to settle with the banksters and drop its investigation, for the good of the people, according to today’s NY Times. Now that’s looking forward — change you can believe in. Here’s the link: http://www.nytimes.com/2011/08/22/business/schneiderman-is-said-to-face-pressure-to-back-bank-deal.html?_r=1&hp
Amazing to see what causes Obama to spring into action. Notice how he did jack sh*t to help the Unions. But Wall Street? He’s all over it.