Message to Fitch and Moody’s: Don’t Downgrade U.S. Debt?

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The biggest news story of the day is the Justice Department’s lawsuit against credit ratings agency Standard & Poor’s for misdeeds that contributed to the financial crisis in 2008. Aside from the obvious questions of “What took them so long?” and “What about the Wall Street investment banks?”, the next question on the minds of some is “What about the other credit rating agencies – Moody’s and Fitch?”

While some news accounts only mention in passing that S&P is one of three major credit rating agency that were all, basically, doing the same thing in assigning Triple-A ratings to all sorts of mortgage related paper a few years back on the mistaken belief that U.S. home prices never go down, at least this Reuters report wonders aloud about why it is that S&P was singled out:

No individuals were charged in the DOJ’s lawsuit, and it was not immediately clear why the government focused on S&P instead of rivals Moody’s Corp or Fimalac SA’s Fitch Ratings, which were also major raters of such securities.

A more interesting treatment is seen in McClatchy’s Is U.S. suit against rating agency S&P actually retaliation?

Among the many questions raised by the pending Justice Department civil suit is why S&P alone is being charged. A person familiar with the department’s investigation of ratings agencies said the probe has gone on for three years and originally also involved Moody’s Investors Service. A Moody’s spokesman did not respond to a request for comment, but Daniel Noonan, a spokesman for Fitch Ratings, the third major rating agency and the only one that is not a publicly traded company, said that “we have no reason to believe Fitch is a target of any such action.”

Investigator interest in Moody’s apparently dropped off around the summer of 2011, about the same time S&P issued the historic downgrade of the U.S. government’s creditworthiness because of mounting debt and deficits.

mcclatchy“After the U.S. downgrade, Moody’s is no longer part of this,” said the person familiar with the case, who demanded anonymity in order to speak freely about the matter.

Others share that perception.

“Why not Moody’s and Fitch?” asked Sylvain Raynes, a onetime Moody’s employee who has crusaded for reforms on Wall Street. “Are they innocent of similar things? Why S&P? Because they downgraded the United States. The fact that this targeted one rating agency when all three are equally guilty is suspicious, (needs) to be explained and leads me to believe that this is a politically motivated lawsuit. Yes, there is wrongdoing, but not everybody who speeds on the highway gets stopped by the cops.”

This should be interesting to watch unfold. Over the years, I’ve never read anything about S&P being rotten while Fitch and Moody’s were choir boys when it came to handing out Triple-A ratings.

Source: Iacono Research

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About Tim Iacono