Probe into US credit history of ratings firm

The US Justice Department is investigating whether America’s largest credit ratings agency, Standard & Poor’s, improperly rated mortgage securities in the years before the financial crisis.

The investigation began before S&P cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political storm surrounding that.

The US justice department has been asking about instances in which company analysts wanted to award lower ratings on mortgage bonds but may have been overruled by managers.

During the boom years for US property, S&P and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made them appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the US housing market and devastate the global financial system.

Despite the outcry over the ratings agencies’ failures in the financial crisis, many investors still rely heavily on ratings from the three main agencies – S&P, Moody’s and Fitch – for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries – but not the US – pay the agencies to receive a rating, the financial market’s version of a seal of approval.

“I think it would have a major impact if there was a successful fraud case that would suggest there would be momentum for legislation that would force them to change their business model,” said Richard Sylla, a professor at New York University’s Stern School of Business.

Prof Sylla said the ratings agencies could be forced to stop making their money off the entities they rate and instead charge investors who use the ratings. The current business model, critics say, is riddled with conflicts, since ratings agencies might make their grades more positive to please their customers.