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Standard & Poor's investigation

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It's only a coincidence, but Standard & Poor's, the firm that downgraded the nation's credit rating two weeks ago, is the subject of a Justice Department probe about its evaluation of mortgage securities before the housing market collapsed.

The investigation, which began before S&P cut the nation's AAA credit rating, is focusing on whether the company's analysts wanted to give lower ratings on mortgage bonds but were overruled by the firm's business managers.

S&P, along with its rivals, Moody's and Fitch, garnered record profits during the housing bubble by overrating mortgage loans, making them appear to be safer than they turned out to be. S&P reportedly gave AAA ratings to $14 trillion in toxic assets between 2003 and 2008.

The ratings firms are paid by banks and other institutions who market the loans, which gives them an incentive to rule favorably on their worth. The Financial Crisis Inquiry Commission, established by Congress to look into the financial meltdown of 2008, found that the banks tried to ensure they would get a positive rating before they agreed to work with them. The banks paid as much as $100,000 for ratings on mortgage bond deals and even more for more complex collateralized debt obligations.

The conflicts of interest in the current ratings system are obvious. The Dodd-Frank financial reform law seeks to rectify them somewhat, but the Securities and Exchange Commission has delayed staffing the office to oversee the ratings agencies.

If the Justice Department investigation finds instances of ratings firm managers exerting influence on analysts, however, it would provide the impetus to scrap the flawed business model that credit ratings firms have relied on.

That would be a deserved comeuppance for S&P, whose favorable ratings of toxic assets helped swell the national debt it decries.

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