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August 18, 2011

No, Not THAT Coincidence

The New York Times has a front page article (“Justice Inquiry Is Said To Focus On S&P Ratings“) with the following lead: “The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis.”  

Right away some suggested that it can’t be a coincidence that the government was investigating the only rating agency to downgrade the US from its Triple A rating (although all 3 major rating agencies may be under investigation).  The suggestions were that it had to be retaliation.  Ace Times reporter Louise Story addressed this issue in the second sentence: “The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action.”

I have no doubt that it is objectively true and provable that the Department of Justice was investigating rating agencies, including S&P, for many months, as they should be doing.  Without the rating agencies slapping Triple A ratings on billions, maybe trillions of assets and complex derivatives that were worthless, there likely would not have been a financial crisis.  The Department of Justice and every other regulator BETTER BE investigating them.  The scandal would be if they weren’t doing that.

What I find curious is that no one seems to have thought it an odd coincidence that S&P lowered the US credit rating while it was being investigated by the US.  After all, S&P has known for a long time that their conduct and actions in precipitating and accelerating the financial crisis have been under investigation.  Shouldn’t someone be asking if S&P lowered the rating in retaliation for those investigations?  Or, maybe, S&P thought it would be much tougher for the US to bring charges after they lowered the ratings because it might be seen, as the mere investigation has been, as retaliation by the US?  Or, given their egregious conduct, S&P might well have wanted to change the discussion away from what they did and the piles and piles of money they made doing it to something much bigger like the credit rating of the US? 

I have no idea why S&P did what it did.  I do know they did it based on something they have no expertise in (the US political system) after having demonstrated they are grossly incompetent, at best, at what they claim to have expertise in (evaluating credit risk).  Given that, maybe, just maybe, the motives of S&P should be scrutinized rather than the US’s.  



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