Why the US Department of Justice Is Cutting Down On Standard & Poor’s
By Wang Wei
The Obama administration’s attempt to grind down on the credit agencies...is really just an attempt to raise the prestige of the government.
Translated By Elizabeth Cao
8 February 2013
Edited by Rachel Smith
China - Huanqiu - Original Article (Chinese)
On Feb. 5th, U.S. Attorney General Eric Holder made an announcement to bring civil action against credit rating agency Standard & Poor’s. The agency is accused of inflating ratings of securities and credit before the financial crisis, causing investors to lose billions of dollars.
The U.S. government initiated legal proceedings against Standard & Poor’s. This is just one of a series of financial and legal cases after the mortgage crisis and this time one of the major credit rating agencies is one of the accused.
International credit rating agency Standard & Poor’s is becoming the federal government's scapegoat. The American government is now telling Standard & Poor’s to assume responsibility for part of the subprime mortgage crisis and pay $5 billion for their role. This is unprecedented action by the U.S. government on rating agencies, causing a lot of nervousness in this industry.
These past five years of the mortgage crisis are due to relatively poor-quality credit loans. In 2008, investment funds were forced to close due to lack of global liquidity, causing great turmoil in the global financial markets. In reality, the U.S. subprime mortgage crisis began to appear in the spring of 2007 and then swept the financial markets in the United States and Europe in August 2007. At that time, international rating agencies, including Standard & Poor’s, failed to reveal this risk in a timely manner, and instead gave inflated ratings. Even as the property market bubble began to break down, the rating that was reported by Standard & Poor’s ensured more profits.
The U.S. Department of Justice in the Federal District Court in California filed the lawsuit against Standard & Poor’s due to the Western Corporate Federal Credit Union’s large investment in mortgage-backed securities based on Standard & Poor’s ratings. Because of Standard & Poor’s assessment, this brought about huge losses to consumers.
Standard & Poor’s released a statement to the U.S. Department of Justice saying that their credit ratings were objective, independent, and not due to the influence of investment banks. The ratings were based on raising revenue, profit, and market share expectations aimed more at safeguarding these banks rather than safeguarding investors’ interests.
In regards to the civil lawsuit brought by the U.S. Department of Justice due to the poor assessment of Standard & Poor’s back in 2007, Standard & Poor’s said in a statement that the U.S. Department of Justice’s civil procedure is neither fair nor legal.
In actuality, Standard & Poor’s attempt to knowingly profiteer during the subprime mortgage crisis did not escape the eyes of consumers. The U.S. government caught Standard & Poor’s in the act and their actions subsequently caused the United States’ sovereign rating to go down in 2011. The Obama administration’s attempt to grind down on the credit agencies in the United States in the post-crisis period is really just an attempt to raise the prestige of the government.
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