How rich that in 2011, or three years after the Wall Street crack-up, Standard & Poor’s wagged its finger at the dysfunction in Washington. Get your act together, the rating agency advised, as it ordered a downgrade in the country’s long stellar credit rating.
On Tuesday, documents surfaced in a federal lawsuit the Justice Department has brought against Standard & Poor’s, charging that the company pumped up its ratings of mortgage-backed securities all while knowing they were deeply flawed. Thus, the department insists, S&P deceived investors and helped fuel the dire consequences.
The rating agency calls the lawsuit “meritless.” What will be hard to shake are the memos and email messages from inside the company, one executive concluding in 2006: “This market is a wildly spinning top which is going to end badly.”
The trouble for S&P and other rating agencies is that they receive fees from the bankers pushing the investment vehicles they are evaluating. When the market is climbing ever higher, it is hard to spoil the party, and the money flowing into your own pockets. One memo captures an executive furious at the suggestion that the agency check with bankers about a change in its methodology.
Too bad that spirit did not prevail enough. Whatever the result of the lawsuit, the record already is plain. S&P messed up. It lost sight of what mattered, or what it found Washington had done.