The credit rating agency, Standard & Poors, announced Monday that it was the target of a civil lawsuit by the Justice Department for its actions in rating the complex securities that played a major role in the 2008-2009 financial collapse. The company also said that it had not been apprised of the details. It is interesting that the other two major rating agencies, Moody’s and Fitch made no announcements.
There is much that all the agencies should worry about. What is publicly known — and it is a great deal — was laid out in the two-year Senate investigation led by Senator Carl Levin (D-Mich.), which ended with the release of a final report in spring, 2011.
The committee staff laid out a formidable case. As early as 2004 and 2005, and increasingly by 2006, the email chatter among the rating agency staffs suggested they were expecting a crisis. One email said: “This is frightening. It wreaks of greed, unregulated brokers and ‘not so prudent’ lenders.” Staff analysts asked why the regulatory agencies hadn’t “come down harder on these guys.” One wrote worriedly about the possibility of “another banking crisis.”
One damning sequence occurred in spring, 2007. Early that year, it became clear that the subprime mortgage market was in serious trouble. Two major subprime issuers failed in December 2006, and in the first quarter of the new year, another 20 failed, including the giant New Century. This was also the period, as we now know, that Goldman Sachs embarked on an aggressive internal clearing of its inventory, or “The Big Short” as it was called, which was largely accomplished by selling to greater fools.
But for the most part, Wall Street and the credit agencies shrugged off the worries and carried on with business as usual. The agencies issued triple-A ratings even on booby traps like the security that Goldman devised for the hedge fund manager John Paulson, so he would have a $1 billion plus security that he could bet against with confidence in its shakiness.