The Justice Department decision to sue Standard & Poor’s has investors asking why Moody’s Investors Service and Fitch Ratings weren’t targeted for awarding the same top grades to troubled mortgage bonds and other debt securities.
“What purpose does it serve for the U.S. government to bring an action against S&P at this point in time? On the surface, is this a bid for some sort of retribution” for the company’s 2011 downgrade of the U.S., Bonnie Baha, head of global developed credit at Los Angeles based DoubleLine Capital LP, which oversees about $53 billion, said in a telephone interview yesterday. “Moody’s and Fitch assigned the same ratings to these transactions. Why aren’t they named as well?”
The Financial Crisis Inquiry Commission and a Senate panel laid the blame on S&P, Moody’s and Fitch for inflated ratings on mortgage-backed securities and collateralized debt obligations that helped cause the worst financial crisis since the Great Depression. Together, they provided 96 percent of all ratings for governments and companies in the $42 trillion debt market in 2011.
The U.S., in a lawsuit filed Feb. 4 in federal court in Los Angeles, is alleging that the unit of New York-based McGraw-Hill Cos. defrauded investors by failing to adjust its analytical models or taking necessary steps to accurately reflect the risks of the securities because it was afraid of losing business.
S&P lowered the U.S. government’s credit rating one step to AA+ from the top AAA rank on Aug. 5, 2011, after months of wrangling between President Barack Obama and Congressional Republicans over whether to raise the federal debt limit. Bond investors repudiated the downgrade and U.S. borrowing costs fell to record lows as Treasuries gained the most since 2008.
Debt markets have judged ratings company rankings to be unimportant, Baha said. “My question is, why are U.S. taxpayers wasting money to prove a fact that’s already widely accepted in the market?” she said.
The Justice Department’s case “looks rather suspicious” because Moody’s isn’t involved, said Peter Wallison, co-director of the Washington-based American Enterprise Institute’s program on financial policy and a member of the inquiry commission.
“It’s very hard to see how Moody’s was doing anything differently than S&P,” he said yesterday in a telephone interview.