A Very Interesting Question

The New York Times reported today that well before their recent downgrade of the U.S. AAA credit rating, the Justice Department had begun an investigation into whether Standard & Poor had improperly rated dozens of mortgage securities in the years leading up to the financial crisis. As the Times reports, “In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.”

After the housing bubble burst, many of us questioned the ethics of a ratings system in which the issuer of the debt being rated paid the rating agency–to those of us uninitiated into the arcane processes of mortgage banking, this seemed to constitute a clear conflict of interest, a practice that suggested the agencies might be, oh, let’s just say “ethically insensitive.” This morning’s report raises the question whether that insensitivity, or ethical blind spot, might have played a role in the recent downgrade of the US credit rating.

Perhaps it was less a matter of acting on the basis of genuine concern (misplaced or not) and more a matter of retaliation for daring to launch an investigation?