Standard & Poor's is the target of a Justice Department investigation into whether it improperly inflated the ratings of dozens of mortgage securities, The New York Times is reporting. The news of the investigation, just two weeks after S&P downgraded the U.S. credit rating, is likely to stoke the heated debate over the credibility of the nation’s largest credit ratings agency.
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The Justice Department has been probing cases from the years leading up to the financial crisis, during which S&P’s business managers may have overruled analysts who wanted to give lower ratings on mortgage bonds, The Times reported, citing sources with knowledge of the government’s interviews. Awarding higher ratings made the mortgages appear more stable -- and more valuable -- and at the same time, S&P’s profits soared. “If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S&P’s longstanding claim that its analysts act independently from business concerns,” The Times reports.
The mortgage inquiry, which "picked up steam early this summer," was launched well before S&P downgraded the U.S. credit rating to AA+, the first time in history the American government credit lost its top rating of AAA.
Since the downgrade, the Securities and Exchange Commission began an inquiry into S&P, asking the agency disclose which of its executives knew about its decision to downgrade U.S. debt in order to check for any potential insider trading, the Financial Times reported last week.