Published On: Tue, Feb 5th, 2013

US Government to Sue Standard & Poor’s – Moody’s May Be Next

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From Market Curator

The United States government is to sue credit rating agency Standard & Poor’s over the triple A ratings the firm gave to mortgage securities prior to the credit crunch and global economic crisis of 2009.

The civil lawsuit, which several US states are expected to join, will focus on decisions by the firm to award the highest rating to a range of mortgage-backed securities – including those based on sub-prime mortgages – in 2007. These securities later collapsed in value. The high rating given to these mortgage bonds helped to fuel a bubble in the sub-prime mortgage sector, and their subsequent collapse in value played a key role in the ensuing credit crunch and debt crisis whose effects are still ravaging the economies of many countries around the world.

Credit rating agencies such as Standard & Poor’s are paid by the issuers of such bonds to provide a rating of their risk, leading to concerns that there may have been a ‘conflict of interests’ – a polite way of saying that these agencies may have been issuing high ratings to secure repeat business, rather than because they had actually assessed the bonds as safe in a proper manner.

Share is Standard & Poor’s parent compay McGraw Hill fell by 14% on Monday as a result of the announcement. interestingly shares in Moody’s – another credit ratings agency – fell by almost as much (10%), suggesting that market analysts believe that they will be next Justice departments hit list.

Credit ratings agency have drawn a great deal of criticism from politicians and pundits, who have suggested that their activities played a large part in creating the conditions for the global economic crisis. In a report published in January 2011 the Financial Crisis Inquiry Commission described the agencies as “essential cogs in the wheel of financial destruction” and “key enablers of the financial meltdown”.

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About the Author

- Dean Walsh is the owner and editor of World News Curator. He also owns and runs Ourly News and a range of other online publications.

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