The Great Recession was one cascading effect of the subprime-mortgage crisis, a crisis enabled by the once-venerable Standard and Poor’s, the credit-rating behemoth owned by the McGraw-Hill Co.
In a civil lawsuit filed last month, U.S. Attorney General Eric Holder, Washington Attorney General Bob Ferguson and other state attorneys general allege that Standard and Poor’s schemed to defraud investors in structured financial products, both residential mortgage-backed securities and collateralized debt obligations (CDOs.) Many of the investors were federally insured financial institutions that were drained of billions based on the S&P’s inflated ratings that lowballed the securities’ actual credit risks.
The Washington state complaint was filed in Snohomish County Superior Court, but it didn’t generate above-the-fold news. It should.
“S&P systematically misrepresented that its analysis was objective and independent. We now know this is not true.” Ferguson said. “In fact, S&P’s analysis was improperly influenced by financial interests.”
Yep, greed. The lofty are not immune from the root of all evil. S&P sided with investment banks over investors, angling for more revenue and market share. To add insult to avarice, the maneuvering has been on-going, with the complaint claiming S&P’s conduct resulted in the company assigning inflated credit ratings to the sub-prime assets packaged and sold by Wall Street investment banks beginning in 2001 and continuing as late as 2011. The impact, however complicated to absorb, is no abstraction.
“S&P’s actions have significant real world implications for the finances of individual investors.” Ferguson said. “These securities are often included in mutual fund and pension fund portfolios that play significant roles in people’s retirement and investment strategies.”
The complaint flows from a federal investigation dating back to 2009, code-named “Alchemy.” (“Dinero Frenzy” would have been more apt.) It was a project of Obama’s Financial Fraud Enforcement Task Force responsible for helping investigate and prosecute financial crimes.
Washington and other state and federal regulators are aiming for a series of actions — consider it the absolute minimum — including a court order to force S&P to refrain from making false representations to the public; changes in the way the company does business; and other relief consistent with the state’s Consumer Protection Act that the court may deem “just and proper.”
Washingtonians know the takeaway, that deceptive ratings played a tangible role in the nation’s financial crisis. Real consequences for S&P must be the mission, with an extra slug of prevention.
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