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U.S. Opinions: Philadelphia

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Justice corrals the credit raters

From an editorial published in Wednesday’s Philadelphia Inquirer:

Although it’s late to the game, the Justice Department deserves polite applause for taking the credit-rating agency Standard & Poor’s to task with a civil complaint against it and its parent, McGraw-Hill Cos. S&P is one of three major credit-rating firms whose faulty predictions lulled investors into thinking exotic mortgage-backed securities were a good bet. As it turned out, they were such a lousy bet that they helped bring on the 2008 crash that still has the country gasping for air.

The problem started with greedy lenders who, egged on by Wall Street, falsified documents so that unqualified home buyers could get mortgages they would never be able to pay back.

Those booby-trapped mortgages were then bundled into mortgage-backed securities and sold to investors, such as retirement funds, with the blessings of the credit-rating agencies. Eventually, large numbers of unqualified buyers defaulted on their mortgages, and the investors who had been reassured by high credit ratings were left to choke on dust as the financial system cratered.

The Justice Department charges that during the run-up to the financial collapse, S&P “knowingly … devised, participated in, and executed a scheme to defraud investors.”

Investors are supposed to be able to rely on the credit-rating agencies’ independent opinions on financial products. But how trustworthy can those opinions be when the rating agencies are paid by the very firms and governments whose products they rate?

Unfortunately, proposals to create barriers between the rating agencies and their paydays are moving sluggishly. The federal complaint should put added pressure on bureaucrats and lawmakers to uncouple the cozy relationships.

In its complaint, the Justice Department released e-mails among S&P employees that demonstrated their arrogant and cavalier attitudes toward investors, underscoring the need for reform.

“Let’s hope we are all wealthy and retired by the time this house of cards falters,” wrote one employee. “We rate every deal,” another wrote. “It could be structured by cows and we would rate it.”

Such wallowing in the mess could be compared to the behavior of another kind of barnyard animal.

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