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Shooting the Messenger? U.S. DOJ Ready to Bear Down on Ratings Agency Standard & Poor’s

The U.S. Department of Justice (DOJ) confirmed what began as speculation from media sources and eventually the defendant itself, on February 4, by filing a lawsuit against one of the “big three” credit ratings agencies. Just weeks after the European Union voted on measures essentially designed to censor overly-negative analysis, warranted or not, by the agencies, the U.S. federal government is taking aim, but at just one of them.

Coincidentally, the target is the only one of the three agencies to have downgraded the United States’ prized “AAA” credit rating. Standard & Poor’s, and later the federal government, each confirmed Monday that the U.S. Department of Justice filed suit against the firm in civil court. S&P is being targeted for poor ratings/analytical performance, like others, in the run-up to the 2007 housing collapse that played a role in the eventual downturn, both domestically and internationally. S&P was also accused by some experts of having acted fraudulently because of commercial incentives and an interest in padding the ratings in a positive way because of some products and services it either sold directly or from which it benefitted.

S&P vehemently denied wrongdoing in a statement issued Monday and noted the “failure of virtually everyone” in predicting the full magnitude of the eventual housing downturn. It is worth noting that in August 2011, S&P downgraded the American sovereign credit rating for what it described as unease with a political “brinkmanship” that shook its confidence in the nation’s ability to deal with its large debt in an efficient manner. It also characterized policymaking among current lawmakers as “less stable, less effective and less predictable” than in the past, which clearly did not sit well at the time or since with members of the U.S. Congress.

It’s the latest shot against S&P from sovereignties unhappy with its ratings. The previous one, however, included Moody’s Investment Services and Fitch Ratings as well. EU leaders voted to approve legislation last month that restricts the timetable in which any of the three agencies could release news of sovereign credit ratings related to any member nation in Europe. The regulations would also empower investors to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or malpractice on the agencies’ parts. Statements all but confirmed that the EU leadership was collectively angry at the ratings agencies for lowering ratings and warning those with massive debt problems, and wanted to “reduce the reliance,” if not the importance, of the agencies on the global stage.

Courtesy of Brian Shappell, CBA, NACM staff writer (National Association of Credit Management)

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