Can We Still Trust Standards & Poor’s?

ForexNewsNow | Published on August 19, 2011 at 9:31 am

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NEW YORK (ForexNewsNow) – Two weeks after Standard & Poor’s shook the global financial markets by announcing the downgrade of the US credit rating, the rating agency is now the object of increasing attention from regulators. According to a New York Times article yesterday, the rating agency will soon undergo a thorough investigation by the Department of Justice (DoJ) on its controversial role in the “Subprime Crisis”. It is important to note that the investigation seems to have started before the announcement of the US debt rating downgrade, from AAA to AA+, on August 5. Yet there is little doubt among political analysts that the enhanced focus on the credit rating agency will only stimulate the animosity of the members of Congress towards the rating agency.

 

S&P’s independance called into question

 

While this is not the first time the role of credit rating agencies has caused controversy in relation to the Subprime Crisis, according to the New York Times, the DoJ was particularly interested in several cases where various S&P analysts wanted to the lower ratings of certain bonds linked to mortgage debt, but were prevented from doing so by higher ranking members in the company. If these suspicions prove true it could deal a severe blow to S&P’s reputation as an independent, unbiased credit rating agency.

The case is all the more embarrassing as it only adds fuel to the fire of critics currently being leveled at the company from the US Treasury. Following S&P’s decision to downgrade the US credit rating, the US Treasury criticized S&P’s methods and called on the to look into the statistics used to justify a the downgrade of the American rating. According to the Financial Times, the SEC has launched a preliminary investigation into possible instances of “insider trading” relating to the selective disclosure of information regarding the decommissioning of certain financial institutions. Although largely pre-announced by the agency in July, the downgrade of the US’s AAA rating has provoked outrage from much of the American political establishment and the recent accumulation of inquiries and investigations against S&P may reopen the debate on reforming the role of credit agencies in Congress.

While the rating agencies remain an integral part of the US’s financial dominance of the global markets, the recent turn of events could eventually result in new laws that would seek to regulate the influence these powerful credit rating agencies have over the world economy and the global Forex market.

 

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