US action against Standard & Poors

Posted by kevin on February 11, 2013 under Foreclosure Blog | Comments are off for this article

Last week, the Justice Department filed a civil suit against Standard & Poors for its contribution to the mortgage meltdown. Why did it take almost 5 years?

S&P rates securities based presumably on risk. A high S&P rating (AAA) could mean the difference between selling a security and not selling it. This concept was not lost on the purveyors of mortgage backed securities. It was essential that S&P (and the other raters) deem their higher tranches to be AAA so that insurance companies and pension would buy. As was stated in a recent blog, S&P provided the gift wrapping for the sponsors of securitized trusts.

The problem, however, as brought out by many commentators (and now the feds), was the S&P was taking a bunch of subprime loans none of which could be rated AAA, bundling them together and somehow the bundle was rated AAA. How could you turn chicken feathers into chicken salad?

S&P, in its own defense, is saying that the government is trying to blame them because they did not predict the housing bubble. Well, not really. What the feds are saying is that S&P really did very little analysis before that gave their stamp of approval on questionable securities. Why? Because S&P got paid a lot of money. Moreover, when it started to become evident that there were problems, S&P was pretty slow on the uptick in downgrading these questionable securities.

We can only hope that the feds do not make a quick and cheap settlement so that it could get a headline in the WSJ. The truth should come out. A may lead to a better method of evaluating securities