S&P Scandal?

The lead story in today’s New York Times, “Justice Inquiry is Said to Focus on S&P Ratings,” describes a business environment filled with inherent contradictions, conflict of interest and corruption. In addition to an investigation by the Justice Department, the Securities and Exchange Commission is also looking into possible malfeasance by Standards and Poors (S&P), and both inquiries were started before the debt ceiling debacle gained full steam in Washington.

Apparently, it is not unusual for the entitities being rated by S&P to pay in advance for that rating, and this situation causes an obvious conflict of interest. The fees can reach as high as hundreds of thousands of dollars. Of course, the ratings agencies, which includes Moody’s and Fitch as well as S&P, first gained notoriety for their inability to predict the housing market crash that set off the financial crisis in 2008 that we are still recovering from. And, most notably, they all ranked mortgage bonds and the related collateralized debt obligations as possessing a AAA rating.

The recent downgrade of U.S. Treasury bonds by S&P, of course, brings much more prominence to this story. But so does the lack of accountability of any financial organization for the financial crash we all experienced.