Tags: obama | sues | s&P | downgrade

Obama's Payback: US to Sue S&P for Mortgage Ratings

Tuesday, 05 Feb 2013 07:44 PM

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The S&P was the first major credit agency to downgrade the United States' triple-A credit rating.

Now the S&P may pay a heavy price for doing so as the Obama administration gets revenge with legal action against the rating agency.

The New York Times reported Monday: "The Justice Department plans to file civil fraud charges against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck."

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The paper said the suit could be filed within days and blamed the agency for bestowing high credit ratings to bundled mortgage securities, making them appear safer than they actually were for investors.

The securities known as collateralized debt obligations (CDOs) suffered a meltdown in the wake of the housing debacle that began in 2007.

The Times' story noted that neither Fitch nor Moody's, credit agencies that also gave high credit ratings to such mortgage instruments, have been included in the Justice Department suit.

Fitch or Moody's also have never downgraded the U.S. credit rating.

Before the housing crisis, financial experts had argued that the collateralized debt instruments were actually safer for investors, because they divided a single mortgage among multiple debt instruments, seemingly lowering the risk to investors who purchased any one instrument.

Bank regulators at the federal and state level had approved the use of such derivative instruments as safe for investors.

But the federal government seems intent on lowering boom on the S&P. And the Times claims an there is an additional SEC action the credit agency will soon follow.

The S&P downgrade of the U.S. credit rating in August 2011 came during the Congressional ruckus over the extension of the debt ceiling.

The unprecedented downgrade by S&P raised the ire of the Obama White House.

Immediately after the downgrade, the Obama adminstration lashed out agains S&P.

Britain's Guardian reported at the time: "The U.S. Treasury and the White House launched an unprecedented attack on the 'credibility and integrity' of Standard & Poor's for its decision to downgrade the U.S.'s credit rating, blasting the agency's 'misleading' calculations and its 'breathtaking' refusal to change its mind."

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The S&P said it took the action because of weaking confidence with Washington to resolve U.S. fiscal woes.

The S&P stated in August 2011: "More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned . . ."

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