It has come late, about five years late. Still, the U.S. Department of Justice has finally taken action against one of the major actors in the global economic meltdown.
Attorney General Eric Holder announced this week that the federal government filed a $5 billion civil suit against Standard & Poor's Rating Services, one of the nation's largest credit rating agencies.
Federal prosecutors accused S&P of fraud for knowingly misrepresenting the risk of mortgage-backed securities and other obscure financial instruments.
Ratings agencies are paid fees by the companies that issue the securities they rate, an obvious conflict of interest. That, say prosecutors, is what led the agencies to downplay the risks to investors. In the years leading up to the global financial meltdown, S&P issued gold-plated ratings for allegedly highly questionable investments.
Investors, large and small, who relied on S&P's glowing assessments, lost billions of dollars when the housing market collapsed in 2008. That's because those glowing assessments were wrong and those convoluted mortgage-backed securities were clearly of very little value.
The federal lawsuit has particular relevance to California. It was filed in the Central District of California, based in Los Angeles. The Central District was home to the now-defunct Western Corporate Federal Credit Union, formerly the nation's largest credit union. The federal government says WesCorp collapsed in large part because it relied on S&P's inflated ratings and purchased those mortgage-backed securities.
California Attorney General Kamala Harris is one of 16 state attorneys general who have joined federal prosecutors in the lawsuit. Harris blames S&P for losses of $1.36 billion sustained by the state's largest pension funds the California Public Employees' Retirement System and the California State Teachers' Retirement System.
CalPERS filed its own lawsuit in 2009 against S&P and two other ratings agencies, accusing S&P of providing "wildly inflated and unreasonably high" AAA ratings to a string of investment deals that went bad.
The impact of those inflated ratings on the lives of individuals in our communities was profound. Who can forget the "For Sale" signs that dotted virtually every neighborhood in Modesto, Merced, Stockton and every community in between? The financial collapse cost thousands of jobs, led to business failures and foreclosures and disrupted the lives of millions of people. It precipitated the worst recession since the Great Depression a recession from which the nation has yet to recover.
In its defense, S&P says its "analysts worked diligently to keep up with an unprecedented, rapidly changing and increasingly volatile environment. ... Regrettably, the breadth, depth and effect of what ultimately occurred were greater than we and virtually anyone else predicted."
Emails and other documents the government has made public suggest that S&P knew far more about the risks than its published ratings stated. It chose not to downgrade its ratings for fear of losing clients the companies selling those securities.
Truly, if S&P didn't know whether or not the securities would hold their value in an "increasingly volatile environment" it was the company's obligation to say so not to rubber-stamp the securities with the company's highest rating.
S&P's protestations are suspect precisely because it was paid by the companies that sold the securities and S&P had little obligation to those who relied on the ratings when buying the nearly worthless financial instruments.
Many say requiring S&P to protect the interests of securities buyers not the sellers would drive down its profits. It might even drive the ratings firms out of business. Perhaps. But are those companies worth having around if no one can trust them?