United States v. Standard &
By R Tamara de Silva
January 5, 2013
The Department of Justice filed a civil lawsuit yesterday against one of the of big three credit ratings agencies, Standard & Poor’s (“S&P”) and its parent company, McGraw-Hill, Inc. The suit alleges that S&P deliberately gave its coveted triple-A ratings to sub-prime debt in order to win fees. The suit does not address the structural conflicts of interest within the three credit ratings agencies that are Nationally Recognized Statistical Rating Organizations (“NSRO”), nor will it address or cure any of the underlying causes of the credit crisis. While there are problems with the credit rating agency business model, it will be difficult to prove that S&P knew any more than even the audit committees of the investment firms on whom it relied, or the issuers of debt instruments themselves. The suit will of course result in the levy of a fine.
But while S&P’s hands may not be entirely unsullied- far more importantly to the untrained public eye, they are as good a scapegoat as any other.
S&P is a credit rating agency whose business is to provide credit ratings represented by letters from triple-A to D, in exchange for fees. Federal laws require that certain institutions only hold investments that have a credit rating of “investment grade,” but most of the financial world relies on credit ratings agencies to weigh and measure risk, risk defined in terms of the credit worthiness of investments and institutions. S&P is the largest of three credit ratings agencies that is recognized by the Securities and Exchange Commission (“SEC”)
as an NSRO. From 2004 towards the end of 2008, S&P assigned credit ratings on nearly $4 trillion of debt instruments. In terms of sheer size and credibility, despite this suit and skepticism of the NSROs particularly in Europe, the world has no credible alternative to credit ratings agencies and specifically nothing to replace, Standard & Poors.
Keep in mind that almost five years after the worst financial crisis in United States history, the Department of Justice has yet to criminally charge a single culpable senior executive or firm. If history is any guide, the Justice Department will reach a civil settlement with S&P wherein the firm will agree, without admitting any wrongdoing, to pay a fine that in relative terms, will have as large a fiscal impact on S&P as the cost of one month’s dry kibble would have to the owners of the Grumpy Cat. The suit asks for a fine in excess of $1 billion but these will typically be negotiated down and the government has not latterly demonstrated a willingness to go to trial with these suits.
Like so many Wall Street settlements reached over the past ten years,
the cost of the settlement fine imposed will ultimately be a pittance relative to the quarterly earnings of the offending firm-S&P is not likely to become the first exception to this rule. Continue reading