Credit Rating Firms Are Targeted For Role In MBS Debacle

The U.S. Justice Department has joined forces with the U.S. Securities and Exchange Commission (SEC) in a massive probe into the credit rating firms’ role the ratings of mortgage backed securities (MBS) leading up to the financial meltdown in 2008, according to the Wall Street Journal and various other news services. Initially, the focus of the probe seems to be on Standard & Poor’s (S&P) but sources close to the case have indicated that the investigation might widen as it proceeds.

According to the SEC, it has been investigating Standard & Poor’s for months and it is now also examining the actions of Moody’s Investor Service, owned by Moody’s Corporation. Specifically, the conduct of the two firms is under scrutiny for their influence regarding a couple of mortgage bond deals. The SEC is trying to decide if fraud was committed by the firms by failing to adequately research and assess the pools of subprime mortgages that composed the structured package of bonds. U.S. Justice Department lawyers have made it abundantly clear that they had already joined forces with the SEC in the investigation prior to the August 5, 2011 announcement that Standard & Poor’s had downgraded the credit rating of the U.S. government from a triple-A to a double-A-plus. Since that announcement by S&P, Moody’s has come out confirming their triple-A rating for the U.S.

Obviously, it is critical to the investigation to determine if S&P improperly rated the mortgage backed securities (MBS) leading up to the financial crisis. According to the article, S&P and Moody’s alike have indicated that they have received various inquiries over the last several years regarding mortgage backed securities (MBS) and in particular who with the firms had been charged with overseeing the MBS rating process. The Justice Department investigators have been focusing on whether the firms were more interested in profits rather than the quality of the ratings they were issuing on the MBS.

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