What happens if you’re endorsed by one federal agency and punished by another?
That’s one question to arise from the lawsuit filed by the Justice Department on Tuesday that seeks 5$ billion in penalties from ratings firm Standard and Poor’s and its parent McGraw-Hill.
Calling the conduct “egregious,” Attorney General Eric Holder alleged fraud in his announcement of the suit, and that S&P improperly inflated credit ratings, which are seen as a major contributor to the financial crisis of 2008.
Despite the actions by Holder and the Justice Department, the S&P is still one of only three ratings agencies approved by the SEC (Fitch and Moody’s being the others). The Dodd-Frank regulatory reform act addressed the oligopolistic powers granted the three firms, but two years after its passage wider competition in the space has yet to happen.
Critics of the suit contend that applications by independent ratings firms for government-approved status continue to languish in bureaucratic red tape, further insulating the three firms in their positions.
Questions are also being raised as to why only S&P is targeted in the suit, since it could be said that Fitch and Moody’s assigned inflated ratings as well.
“We’ve long argued that the government should not endorse any company’s opinions about credit risk, which at the end of the day is all a credit rating is—an opinion,” The Wall Street Journal argues in an editorial on Wednesday. “And for that reason the government will not have an easy time making a fraud case.”