The U.S. Securities and Exchange Commission (SEC) is fed up with Standard & Poor’s (S&P) and their less than honorable way of dealing with mortgage bond ratings.
S&P has been charged for skewing mortgage ratings in order to bring in more cash. These allegations are based on a case beginning in 2011. This is, of course, a point of contention as the companies selling investments are paying the companies who rate them. For S&P, this looks to be the end of the line in terms of their popular status of a trusted mortgage bond rating company, one that investors were doing business with based on good faith.
This past June, S&P was slammed with a notice of a pending investigation into their commercial mortgage-backed securities, the ones sold to investors and traded on market. This investigation came after S&P pulled their ratings by Goldman Sachs and Citigroup and then conveniently sent the department head, Peter Eastham, back home to Australia. It is speculated that the company settled with the SEC and certain attorneys general after a large (read: $60 million) charge was recorded.
As if this behavior isn’t enough, it comes not long after a 2013 lawsuit filed against S&P by the U.S. Department of Justice for $5 billion. This lawsuit charged the company with inaccurate mortgage ratings in order to stay on the upswing on Wall Street.
Word of the 2013 lawsuit against S&P and their parent company, McGraw-Hill, sent shares into a steep decline. The company’s illegal behavior is said to be directly tied to the 2008 mortgage and financial crises- the worst recession in the United States since the Great Depression in 1933.
The financial crisis came about when homebuyers were loaned more money than the amount for which they were originally qualified- an action that had a step payout for investors and mortgage companies, but quickly backfired when those loans went sour and foreclosure was on the rise.
In 2010, the Frank Dodd Act (conveniently dubbed ObamaCare for banks) was signed by President Barrack Obama to restrict banks from doing similar things to the S&P scandal. This December, however, it has been speculated that the Frank Dodd Act will be removed from the upcoming government spending bill, allowing financial and mortgage companies to go back to their old way of doing things.
The rating agencies blessed toxic trash mortgages packaged with investment grade ratings so they could improve their bottom line according to Peter Mougey, head of Levin Papantonio’s Securities & Business Torts Department. Mougey believes the ratings agencies’ business model is filled with conflicts of interest as they essentially sell investment grade ratings to the issuers. All the while, Main Street uses the ratings to invest their hard earned life savings. “The ratings,” Mougey says, “is The Emperor with no Clothes. It is about time they are held accountable.”