Report: S&P under investigation

WASHINGTON - The Justice Department is investigating whether the Standard & Poor's credit-ratings agency improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to a report in the New York Times.

The investigation began before Standard & Poor's cut the United States' AAA credit rating this month, but it's likely to add to the political firestorm created by the downgrade, the newspaper said. Some government officials have since questioned the agency's secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In its report on Wednesday, the Times cited two people interviewed by the government and another briefed on such interviews as its sources. According to people with knowledge of the interviews, the Justice Department has been asking about instances in which the company's analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S&P business managers.

If the government finds enough evidence to support a case, it could undercut S&P's long-standing claim that its analysts act independently from business concerns.

S&P and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market.

Companies and some countries - but not the United States - pay the credit-ratings agencies to receive a rating, the financial market's version of a seal of approval.

Before the financial crisis, banks shopped around to make sure agencies would award favorable ratings before agreeing to work with them. These banks paid as much as $100,000 for ratings on mortgage-bond deals, according to the Financial Crisis Inquiry Commission, the Times said.

Critics say this business model is riddled with conflicts of interest since ratings agencies might make their grades more positive to please their customers.

The Times said the Securities and Exchange Commission also has been investigating possible wrongdoing at S&P, citing a person interviewed on the matter.

by Associated PressAug. 19, 2011 12:00 AM





Report: S&P under investigation