Americans have wondered, and with good reason, why the Wall Street robber barons whose greed and incompetence brought the economy to its knees five years ago have escaped punishment. This week’s filing of civil fraud charges against Standard & Poor’s, the largest credit-rating agency in the country, for its role in that collapse suggests that some measure of justice may yet be enacted.
On the opposite page, Paul Krugman of The New York Times writes that the establishment of an independent Consumer Financial Protection Bureau is being hamstrung by congressional Republicans whose campaign finance accounts were fattened last year by the Wall Street agencies the bureau would regulate. President Obama and congressional Democrats must alert the public to the GOP-Wall Street effort to set up America for another disaster. The Justice Department’s action against S&P, however, opens up another avenue by warning agencies and lenders they may pay for their actions in court.
By inflating the ratings of mortgage securities and related schemes it knew were risky, S&P "engaged in a scheme to defraud investors," according to the civil suit. In doing so, Justice said, S&P was attempting to increase its business while abandoning the objective analysis that was the foundation of its credibility as a huge rating agency. The department is seeking $5 billion in penalties against S&P for causing investors to lose billions of dollars in misrepresented mortgage securities from 2004 to 2007.
S&P asserted Tuesday that it did not anticipate the speed and severity of the burgeoning economic crisis and how it would affect credit. In essence, its defense is incompetence. The Justice Department offered S&P a deal in which it would pay a fine of about $1 billion and admit to at least one degree of fraud, which S&P rejected, apparently confident the department would come back with a lesser penalty as has been routinely the case. Instead, Justice brought down the hammer.
S&P, Moody’s, Morgan Stanley and other rating agencies have hidden behind the First Amendment -- that last refuge of scoundrels -- by claiming their ratings are opinions and protected as free speech. Newspapers, which truly value the First Amendment, know that willingly including false or malicious statements in an opinion piece will not win protection under the Constitution, nor should it. A New York judge’s ruling last summer in U.S. District Court that "false and misleading" ratings do not provide agencies First Amendment protection from lawsuits cut the legs out from beneath that cynical defense.
Attorneys general from several states, including neighboring Connecticut, have joined the federal suit against S&P and we urge Massachusetts Attorney General Martha Coakley to do the same. This state suffered from this scheming and the economic carnage it caused and should be compensated. In doing so, the state will reinforce the message that this chicanery can’t happen again, and that if it does, there will be legal retribution.