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S&P's 'Golden Goose'

The Justice Department is investigating whether Standard & Poor's improperly rated mortgage-backed securities during the housing boom, the NYT reports.

The story says the investigation started before S&P downgraded the U.S. earlier this month. This is not surprising, given the fact that the ratings agencies have been criticized for years for giving high ratings to mortgage-backed securities that collapsed in the crisis.

In fact, investigators appear to be following up on a Bloomberg News story published nearly three years ago.

Today's NYT says:

Investigators have been asking about a remark supposedly made by David Tesher about mortgage security ratings, two people said. The investigators have asked witnesses if they heard Mr. Tesher say: "Don't kill the golden goose," in reference to mortgage securities.

The Bloomberg News story, from September, 2008, quotes Richard Gugliada, a former S&P managing director:

Gugliada says that when the subject came up of tightening S&P's criteria, the co-director of CDO ratings, David Tesher, said: "Don't kill the golden goose."

Today's NYT story says Gugliada "has been mentioned in investigators' interviews."

The agencies have been criticized in part for their business model: They were paid by the banks whose securities they were rating. The 2008 Bloomberg story describes a "race to the bottom" in which S&P and Moody's both "repeatedly eased their standards as they pursued profits ... ."

One key question today's NYT story does not answer — but that seems likely to emerge in the follow-up coverage — is whether the Justice Department is also investigating Moody's and Fitch, the other two big ratings agencies.