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A Wall Street Journal report says prosecutors are preparing to file lawsuits against the credit rating agency Standard and Poors, arguing S&P played an allegedly illegal role in the 2008 financial meltdown.
The charges are coming now because of a “breakdown” in private settlement talks after lengthy investigations, according to the article. It would be the first federal enforcement action against a credit-rating firm over the crisis. (That sure took a while, didn’t it?) Congress has been criticizing the agency and its rivals, Moody’s and Fitch, for years because they were supposedly giving subprime-mortgage assets too-good ratings.
There’s no word yet on why S&P was singled out, or any of the key details of the suit. (Although S&P was the first big credit agency to downgrade America’s debt, it’s presumably not a revenge thing.) These probably won’t be available until it’s filed and prosecutors speak publicly. But we can get an idea of what this is about from a 2011 Financial Crisis Inquiry Commission report, which in part says this…
The mortgage-related securities at the heart of the crisis could not have been marketed and sold without [credit-rating agencies'] seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies.
We also have an idea of how S&P will argue the case: in the past, the firm has said its ratings are protected as free-speech opinions by the First Amendment. Sometimes that’s worked with judges, and sometimes it hasn’t. Time will tell what happens here.