By Michael Hudson and Aaron Mehta, iWatch News
In April 2002, Georgia Gov. Roy Barnes won legislative approval for a law to hold Wall Street accountable for bankrolling predatory lending. After the Democrat lost reelection that fall to Republican Sonny Perdue, the finance industry launched an all-out assault on the provisions of the law that held mortgage investors liable if they bought fraud-tainted home loans.
One of the defining moments in the legislative fight came when Standard & Poor's, the giant debt rating company, announced it would no longer rate securities that might be backed by loans covered by the Georgia law, raising the specter that investors would cut off the flow of money into the state's mortgage market and cripple its ability to provide credit to homeowners.
As the financial markets roil, one of the critical factors weighing down the U.S. economy is the flood of home foreclosures. Thursday's crash underscores how difficult it will be for the economy to make significant strides while the housing market is still in tatters.
In its first report to Congress, the all-star team made up of Washington's top financial regulators recently warned that the United States faces potential losses connected with the European debt crisis.
Any assumptions of market stability, the Financial Stability Oversight Council said, should be met with "a heavy dose of skepticism."
The stock market is in a tailspin after the U.S. government lost its AAA credit rating for the first time in history, raising echoes of the catastrophic Wall Street fallout three years ago.
But how did it all begin? Who were the key players? Where do regulators go from here? Here, we recount the Center for Public Integrity's top stories on the 2008 financial meltdown and the subsequent market and government response.
In March 2003, the legislature buckled to pressure and passed amendments shielding mortgage investors from liability. Other states saw what happened in Georgia and shied away.
"It's outrageous," Barnes, now an attorney in private practice, told iWatch News . "The same crowd that was telling us that predatory subprime loans were AAA credit is now telling us that the credit of the United States is not AAA."
The "overbearing bureaucracy" that caused the last collapse, Barnes said, now may be "on its way to causing another collapse."
S&P's role in the financial crisis is coming under increasing attention after its decision last week to downgrade the U.S. government's credit rating. Critics charge that S&P and other credit rating companies played an important role in lobbying to prevent Wall Street from being held accountable for abusive practices -- and by providing their seal of approval to toxic mortgages that helped spark America's economic woes.
In a news conference, S&P defended its downgrading of the U.S.'s credit rating, calling Washington's high-stakes battle over the federal debt ceiling a "debacle."
An S&P spokeswoman, Patricia Rockenwagner, told iWatch News on Monday: "Our analysts convey independent opinions about creditworthiness to the market using rigorous analytical criteria. Our lobbyists express views about public policy to the government. There is a strict firewall that separates the two -- always has been, always will be."
$10 Million Spent on Lobbying
An iWatch News analysis of lobbying data indicates that the three largest rating agencies combined to spend more than $10 million on lobbying in the last nine years.
S&P, Moody's Investors Service and Fitch Ratings have all come under scrutiny as officials in Washington have attempted to prevent a downgrade of the U.S. government's credit rating last week. While Moody's and Fitch stood pat, S&P downgraded the federal government's credit rating from "AAA" to "AA+." The downgrade sent stocks into a tumble, with the Dow dropping more than 630 points on Monday.
Despite their power over world economies, credit rating agencies are private enterprises, with no prohibition on lobbying at either the federal or state level. An analysis of data collected by the Senate Office of Public Records revealed:
- The three firms spent more than $10 million combined on federal lobbying since the start of 2002. Moody's was the most active, spending about $7.3 million on lobbying, followed by Fitch with about $1.8 million and S&P with about $1.5 million.
- The companies' spending on lobbying has increased significantly since 2008, totaling over $6 million. The increase was mostly driven by Moody's and Fitch; S&P has remained relatively consistent.
- While the three companies do not have political action committees, individuals working at these agencies have contributed about $190,000 to political causes since the start of 2005. The top recipients of those contributions: President Barack Obama (at least $33,000), former Democratic Rep. Joe Sestak and the Democratic National Committee (at least $17,000 each), the presidential campaign of Sen. John McCain (at least $16,900) and the various campaigns of Hillary Clinton (at least $12,500), now the Secretary of State.
Much of the increase in lobbying from these agencies came during the fight over the Dodd-Frank financial reform bill.
"The rating agencies were visiting every office," said Marcus Stanley, a former U.S. Senate staffer who is now policy director for Americans for Financial Reform, which advocates for tougher financial regulation. "They knew that their profits were at stake."
Last year, Sen. Al Franken, a Minnesota Democrat, authored a bill that would have created a government middleman to dole out rating assignments, but it was dropped in committee. At the same time, ratings agencies were working hard to limit the damage of Dodd-Frank, which contained provisions making it easier to launch a lawsuit against the companies if they were found to be "grossly negligent."