DoJ now probing S&P over mortgage-bond ratings

S&P bond ratings have been in the news of late, haven’t they?  The rating agency downgrade of American sovereign debt embarrassed the White House and touched off a firestorm of controversy across the political spectrum.  Now, just coincidentally, the Department of Justice has decided to launch an investigation of S&P over the ratings it gave mortgage-backed securities during the lending bubble:

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, according to two people interviewed by the government and another briefed on such interviews.

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. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

Did the investigation begin before the downgrade?  The DoJ leak to the New York Times — a friendly venue for the Obama administration — certainly took place afterward.  The “error in its debt calculations” came as part of the downgrade itself, so if that’s part of the rationale, then it doesn’t sound like this was a long-standing investigation.

For that matter, S&P was hardly the only agency to rate Fannie and Freddie’s MBSs as AAA.  Are we probing agencies that didn’t downgrade US sovereign debt on Obama’s watch?

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.

Unclear?  Did the Times bother to ask its two sources the question?  If a probe is being launched on bond ratings without any political motivations, then it should involve all ratings agencies, something two sources with knowledge of S&P’s being a target should know one way or the other.

Probing the bond raters over the AAA rating for Fannie and Freddie MBSs is the height of hypocrisy.  Congress mandated that the two GSEs securitize their mortgage portfolios so that they could generate more cash to buy up increasingly bad paper.  It was the US government’s relationship to Fannie and Freddie, and especially the MBSs, that made the ratings agencies believe that the US would back the bonds.  And let’s not forget that they turned out to be right, as Congress and the Bush administration ended up bailing out everyone who bet on those MBSs.

In fact, this is the same administration who has not lifted one finger in fixing the central problem of those AAA ratings, which is the connection of Fannie and Freddie to the government.  And let’s also not forget that this administration has the FHA doing the exact same thing – buying up marginal loans and securitizing them through MBSs.  Should S&P rate those as junk bonds?  (Yes.)

This is nothing more than a political vendetta, dressed up in populist outrage.

Blowback