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Last week, the U.S. Justice Department’s legal suit against Standard and Poor’s Rating Services captured much public attention and gave rise to a heated debate. It is by far the first legal case against a rating agency over the cause of the crisis. The government believed that the rating giant should be accounted for its overly optimistic ratings toward mortgage-backed securities and collateralized debt obligations that misled the market and cost investors billions of dollars. Moreover, over the past few years, the government has been investigating whether the firm’s management was involved in intentionally pushing the standards lower for certain kinds of bonds, a misconduct that would potentially bring about a serious disaster for this New York based company.
Indeed, before the housing bubble burst and the crisis began, most MBS’s and CDO’s were given AAA ratings because rating analysts all agreed that the investment was so diverse that it could provide investors a safe net against losses. The government believed that it is this kind of misleadingly high ratings that attracted a huge number of investors into the trap of MBS and CDO investments.
Yet, suing a rating agency for granting certain bonds higher ratings, in some sense, is like accusing a wizard for failing to predict the future, a metaphor that S&P spokespeople have been using repetitively to show their innocence. Furthermore, the rating firm has been emphasizing that this latest crisis is by no means caused by a single financial facility. Instead, it is the result of a combination of complex macro- and micro-economic factors that range from government policies to investor behavior, which as a matter of fact partially affected all rating firms’ credit ratings towards different kinds of equity and bonds.
Ruijia Tan
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