S&P Faces Inquiry Over Mortgage Security Ratings

The Justice Department is investigating whether Standard & Poor's improperly boosted ratings on mortgage securities that later turned out to be toxic, helping trigger the worst financial crisis in decades.

NPR has confirmed the investigation, first reported Wednesday by The New York Times. The Wall Street Journal earlier reported a separate probe of the agency by the Securities and Exchange Commission.

A source familiar with the probe told NPR on Thursday that the Department of Justice has an open civil investigation of S&P that began before the credit rating agency's controversial decision earlier this month to downgrade U.S. sovereign debt. The source could not say whether the two other major ratings agencies — Moody's and Fitch — were under similar scrutiny.

Contacted Thursday by NPR, a spokesman for Fitch Ratings said it was unaware of any government investigations directed at the firm.

Moody's repeated a statement that it periodically receives and responds to requests from oversight and governmental authorities in connection with ongoing inquiries.

Representatives of the Justice Department and the SEC declined to confirm any investigations.

Ed Sweeney, a spokesman for S&P, told NPR that S&P "has received several requests from different government agencies over the last few years regarding U.S. mortgage-related securities. We have cooperated and will continue to cooperate with their requests."

He said the agency bars analysts from "participating in fee negotiations" and does not allow "personnel who are involved in commercial activities to [be] on a rating committee."

S&P, Moody's and Fitch have reaped profits from securities firms whose mortgage bonds they rated, but the agencies have always maintained that their analysts act independently from business concerns. In the wake of the financial crisis, that claim could face renewed scrutiny if the government uncovers evidence that managers leaned on analysts to burnish the ratings.

The Justice Department would have to prove S&P did more than just give a bad opinion, NPR's Tamara Keith told Melissa Block on All Things Considered.

"Ratings agencies have sort of a protected status. Their ratings are opinions, and opinions are protected by the First Amendment," she said. "[The Justice Department would] have to prove that the statements were misleading or there were omissions and that S&P knew that it was doing that."

If the department proves its case, "it certainly would be a significant indictment of Standard & Poor's and their methods. Ratings matter inasmuch as the reputation of the rating agencies are sound," Jeffrey Manns, a professor of law at George Washington University, said.

The Justice Department investigation began before S&P cut the United States' AAA credit rating earlier this month, the first-ever downgrade on U.S. debt. Some government officials have since questioned the agency's secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

Manns, who is also an expert in credit ratings agencies, said the focus of the Justice Department investigation appears to be "on whether the business side at S&P overruled the analyst side on pushing back on potential downgrades in mortgage-backed securities."

"The allegations were made that banks went about and effectively shopped rating agencies to make sure that they could secure the highest possible rating to make sure that their debt would be sold at the best possible price," he said.

NPR's Scott Neuman, Tamara Keith and Carrie Johnson contributed to this report, which contains material from The Associated Press

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