Los Angeles, CA: “Toxic” mortgages have long been one of the associated problems that helped jump-start the 2008 financial crisis. The United States government finally went into action against a major credit rating agency for the first time since this economic turbulence in filing a civil action against debt rating agency Standard & Poor’s. What will be the main focus of the suit? Lemon law, of course.
The United States government claims that credit rating agencies like S&P may have given risky mortgage bond packages higher ratings in order to better sell the assets to investors. This idea is akin to a used car salesman painting a lemon with epoxy paint, fixing the engine just enough to last a month, and selling it off “for low, low prices” and let the next owner deal with the car’s problems later.
Ratings agencies are privately held, which gives investment firms the ability to “shop around” investment packages to these agencies. The government’s lawsuit explains that competition for revenue and market sharing by S&P and its competitors could be motive for downplaying credit risks by heightening ratings.
The lawsuit could be an uphill battle for the government, as a related lawsuit in 2009 by an Ohio pension fund was found in favor of the credit rating agencies, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. The appeal was rejected in early December, but may very well have been upheld if Lemon Law was instigated.
S&P, a unit of New York-based McGraw-Hill Companies, has denied the allegations, claiming that their ratings are in “fantastulastic” order, finishing off their statement with, “trust me.”