DoJ to S&P: How dare you rate our mandated securities so highly, or something

In other words, no good deed goes unpunished.  The Department of Justice filed a lawsuit against credit rater Standard & Poor’s yesterday almost five years after the collapse of the housing bubble nearly destroyed the financial sector.  The DoJ blames S&P for giving mortgage-backed securities (MBS) unreasonably high ratings, which allegedly misled investors into believing them to be a safe bet:

The Justice Department sued Standard & Poor’s Ratings Services late Monday, alleging the firm ignored its own standards to rate mortgage bonds that imploded in the financial crisis and cost investors billions. …

The government was seeking penalties of more than $1 billion, another person close to the talks said, which would be the biggest sanction imposed on a firm related for its actions in the crisis.

S&P officials also were rattled that the government was pushing the company to admit wrongdoing that could leave it more vulnerable to pending or new lawsuits by investors.

If that isn’t full of hypocrisy and irony, there’s also this:

S&P said Monday that it “would be wrong” to contend that its ratings were “motivated by commercial considerations and not issued in good faith.”

This lawsuit is breathtaking in its hypocrisy.  After all, S&P didn’t issue mortgage-backed securities and insist that the housing bubble could go on forever.  The MBS blizzard came from the two GSEs, Fannie Mae and Freddie Mac. Congress authorized them to securitize the paper they bought from lenders in order to encourage riskier loans to buyers who otherwise wouldn’t have qualified for home loans. And that was motivated not by normal regulatory concerns or “good faith,” but by political considerations and a desire by both Democrats and Republicans to conduct social engineering rather than regulate rational markets.

It was Congressional intervention, not S&P, that fueled the irrational demand on both sides of the lending markets.  People bought houses they couldn’t afford, took out home equity loans on equity that never really existed, and lenders shoved money into the hands of people who couldn’t even establish that they had an income (remember No Income Verification-No Down loans?). S&P and other rating agencies may have erred in rating these bonds as highly as they did, but the Congressional intervention behind the GSE-issued MBSs left everyone with the very distinct impression that the government would stand behind these bonds.  And guess what?  They were correct.  In the end, Congress bailed out Fannie and Freddie.

This lawsuit is just an attempt to shift blame away from the real culprits: Congresses from 1998-2008.  Why? Because if Washington DC can blame the ratings agencies instead of the bond issuers and their enablers inside the Beltway, then they can circle back around again and start distorting the lending markets for their social engineering.  Plus, it’s not a bad revenge for that credit downgrade in August 2011, either.

Jazz Shaw Jun 22, 2021 6:01 PM ET