Yesterday I wrote about the suspicious timing of the Department of Justice opening an investigation into the credit rating practices of Standard & Poor′s with regards to mortgage-backed securities. How it comes on the heels of the S&P downgrade of the U.S. Treasury bond rating. Two points need to be made as why this is suspicious. First, While S&P may actually warrant an investigation on their ratings of the mortgage-backed securities, so too do Moody′s and Fitch. In fact, Moody′s in particular, since they specialize in rating private equity. Secondly, we often hear from the Democrats and the Obama administration about how only S&P downgraded the U.S. AAA rating, which is seen as a rash, unwarranted decision. But the truth of the matter is that other credit rating agencies downgraded U.S. Treasuries BEFORE Standard & Poor′s did.
Now, there are several ′flavors′ of credit rating agencies. The big boys, S&P, Moody′s and Fitch, are hired by those issuing a security to have it graded. One could say this is a conflict of interest, or at least a disadvantage to those who purchase such securities. The Securities and Exchange Commission has a total of ten credit rating agencies on their NRSRO list, Nationally Recognized Statistical Rating Organization. These ten agencies are considered by the SEC to be reliable and trustworthy, and they include all three of the ′Big Boys′. But the list also recognizes an independent rating agency, which is paid by investors to examine and rate a security. That company is Egan-Jones, and they downgraded U.S. Treasuries from AAA to AA+ back in mid-July.
Another firm, which is not on the NRSRO list, Weiss Ratings, was actually the first U.S. firm to downgrade the United States. Back in April, they removed the AAA status to BBB. By mid-July, they downgraded America again to BBB-, just a single notch above junk bond status. As early as May 2010, Weiss publicly challenged the major ratings agencies to downgrade U.S. bonds. In July 2010, the Chinese firm of Dagong was listening and they downgraded U.S. bonds to AA, then A+ last November to just A in August, 2011.
So the point here is simple. Not only is Standard & Poor′s apparently being singled out for possible legal issues in their rating of mortgage-backed securities, despite other firms also doing the same, but this whole argument that the S&P downgrade of U.S. bond ratings being unfair and uncalled for is totally false. Other agencies have also downgraded us before S&P did. Some could say that their downgrades were far more objective and timely. But either way, the Department of Justice investigation of Standard & Poor′s is looking more like a witch hunt, or some political attack, than an objective review of the facts. Oh, late Thursday, a DOJ leak to the press claims that they are now also investigating Moody′s, too.