Reported Standard & Poor's Investigation Lends Credence To Senate Financial Crisis Report

08/18/2011 08:07 pm ET | Updated Oct 18, 2011

NEW YORK -- As the financial world absorbs news that the federal government is apparently investigating potential misbehavior at Standard & Poor's, the reported probe lends credence to findings of a Senate panel, which said the credit rating agency helped cause the financial crisis.

The Department of Justice is looking into potential conflicts of interest at S&P, which gave top seals of approval to mortgage securities that later turned out to be toxic, the New York Times reported Thursday. S&P and its competitor Moody's Investors Service provided "the most immediate trigger" to the financial crisis, said an April report from a Senate panel.

News of this investigation is welcome, said Sen. Carl Levin, who chairs the Senate Permanent Subcommittee on Investigations, which issued the report.

"The hearings held by the Permanent Subcommittee on Investigations and our subsequent report documented reckless actions and significant conflicts of interest on the part of the credit rating agencies that contributed to the financial crisis," Levin said in a statement emailed by a spokesman.

"It is totally appropriate for U.S. law enforcement agencies to review that sad record," he added.

The major credit rating agencies repeatedly sold their top ratings to investment bank clients in order to win favor with those clients and gain market share, the Senate panel alleged in April. These companies are paid by banks to rate the products the banks churn out.

The Justice Department is looking at cases in which S&P analysts wanted to grant a low rating, but were overruled by others at the company, the New York Times reported.

That idea is consistent with the Senate report, which said the rating process was tainted by conflicts of interest, alleging that rating companies provided rosy assessments in order to keep clients happy. Complicated products like collateralized debt obligations, or CDOs, got top-flight ratings that the agencies later slashed en masse as the housing market collapsed.

A spokesman for S&P said at the time of the Senate report that the company has worked to improve the independence of its ratings since the financial crisis.

The Senate panel offered email evidence to back up its allegations of conflicts of interest.

"We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week," reads a 2004 email from an S&P manager, "because of the ongoing threat of losing deals."

"I would rather not drop S&P from the upcoming deal," a Nomura investment banker warned in 2005, when it looked like the bank wouldn't get the high rating it wanted.

While Levin applauded the reported Department of Justice investigation, some analysts said it misses the point.

These experts lamented on Thursday that the government wasn't taking tougher action against other financial actors, which the Senate panel said worked with the rating agencies to inflate the housing bubble that ultimately ravaged the economy.

"The rating agencies were the supporting actors. They weren't the stars," said Janet Tavakoli, president of the Chicago-based consulting firm Tavakoli Structured Finance. Tavakoli is a long-time critic of the rating agencies, and recently issued a report saying those companies did not deserve a designation bestowed by the government that gives their ratings special status.

"If these people are used as scapegoats, then it becomes part of an ongoing cover-up," she added. "The key drivers of this whole mess were the banks that supplied the money train to keep this going."

Ann Rutledge, founding principal of the structured credit consulting firm R&R Consulting, said the economy's most fundamental problems have not been solved.

"If we don't have a system for channeling capital appropriately to productive uses," she said, "then lawsuits don't matter."