From the October 01, 2011 issue of Futures Magazine • Subscribe!

S&P giving top marks again

Hair of the dog

On Aug. 5, Standard & Poor’s (S&P) downgraded the United States’ sterling credit rating of AAA to AA+. Now, S&P is poised to give the rating it denied the United States to a group of securities backed by subprime mortgages.

More than half of Springleaf Mortgage Loan Trust 2011-1 is slated to receive the AAA grade. The fund, which is tied to $497 million lent to homeowners with below-average credit scores, was created by Springleaf Finance Corp, a lender to borrowers with risky credit.

In April, the Senate’s Permanent Subcommittee on Investigations released its findings from a two-year study into the financial crisis, stating that S&P, Moody’s and Fitch Ratings helped trigger the situation and "constituted a key cause of the financial crisis." The report went a step further, alleging that massive downgrades made by the credit rating agencies a few months before the financial meltdown "precipitated the collapse of the residential mortgage backed-securities and CDO secondary markets" because the changes were "unprecedented in number and scope."

Jay Gould, partner at Pillsbury Winthrop Shaw Pittman LLP, says irony doesn’t begin to describe the situation. "The SEC has jurisdiction over the rating agencies and should investigate the methodology used in connection with issuing these types of ratings on the theory that such ratings represent systemic risk," he says. "One of the many shortcomings of Dodd-Frank was to continue to allow rating agencies to engage in issuing ratings where the conflict of interest is so obvious and so dangerous to the system."

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