Most of the time, court cases are manna for journalists. The politicians and corporations we cover aren’t in the habit of dishing out information they don’t want the public to know. But along comes a lawsuit, and the parties are often forced to put a lot of juicy details on the public record. So when the Justice Department yesterday announced a joint federal and state lawsuit against the ratings agency Standard & Poor’s for defrauding investors in the run up to the financial crisis with its overly optimistic ratings of mortgage-related investments, I was excited to see what new dirt the complaint would unearth.
Much to my chagrin, however, the complaint is a fairly mundane read for the simple fact that we have known for years that the ratings agencies were hamstrung by a fundamental conflict of interest: They are paid by the sellers of securities rather than the buyers. So during the inflation of the real estate bubble in the early 2000s, as investment banks scrambled to package mortgages into complex financial instruments, ratings agencies also scrambled to figure out how to get those investment banks to chose them to rate their securities. What was S&P’s strategy to entice investment banks to pay it rather than its competitors? Rate their securities higher.
The complaint does put this dynamic into sharper relief, as it provides us with the details of conversations, emails, and instant message exchanges that show the evolution of S&P’s ratings philosophy from one focused primarily on accurate