The long awaited prosecution against a U.S. credit rating has finally arrived. The Department of Justice filed a civil suit this week alleging that Standard & Poor’s committed mail and wire fraud and defrauded investors with ratings of residential mortgage backed securities (RMBS) and collateralized debt obligations (CDOs). These securities are known in regulatory and market parlance as “asset backed securities” because loans or bonds are bundled into larger, more complex securities. Until this market collapsed in the 2008 financial crisis, it was the source of great profits for banks, investors and credit rating agencies. It also accelerated the collapse of the financial system as the securities were sold around the world to increasingly less sophisticated investors.
At the core of the allegations against S&P is that the ratings agency loosened its methodology to get more market share from Moody’s and Fitch, the other dominant raters. Bloomberg writes:
In 2004, S&P discussed changing its rating criteria as executives internally raised concerns about losing deals to competitors.
One analyst in May 2004 wrote that the company was losing a ‘huge’ deal to a competitor because S&P was more conservative than others, the government said.
‘This is so significant that it could have an impact on future deals,’ the analyst wrote, according to the complaint. ‘There’s no way we can get back on this one, but we need to address this now in preparation for future deals.’