Summary: This just in: S&P mis-rated some Mortgage Backed Securities. Who knew? The cynic might say that the government’s suit against S&P for its role in the housing boom and bust is payback for the credit downgrade S&P gave the US government. After all, Justice didn’t accuse Moody’s or Fitch, and they missed the downturn, too. In fact, almost everyone did. But it’s probably the case that Moody’s and Fitch are still negotiating a settlement. That’s why they haven’t been sued yet. And it’s hardly new news that S&P (and Moody’s, and Fitch) blew some calls. In fact, the Financial Crisis Inquiry Commission explored all of this. In their report (issued two years ago) they stated: “The three credit rating agencies were key enablers of the financial meltdown. The securities at the heart of the crisis could not have been sold without their seal of approval.” But there’s a big difference between errors of judgment and fraud. To err is human. And to willfully misunderstand something happens all the time, when self-interest gets in the way. Upton Sinclair famously stated, “It’s difficult to get a man to understand something when his job depends on not understanding it.” As long as rating agencies are paid by the parties that they rate, they will be conflicted, and will misunderstand things. Is the answer an open-source credit rating system, where everyone knows the rules and thresholds ahead of time--Google-ratings? Seems to me that sort of system is liable to be “gamed,” with deals structured to just get by. The Justice Department may claim they’re pursuing fraud, but to many observers this just looks like scapegoating. And everyone loses credibility in the process. Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @GlobalMarketUpd
