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S&P Lawsuit: Why Were Moody's and Fitch Spared the Wrath of the US Government?


Some are saying that because S&P was the only rating agency to have downgraded US debt, it is being singled out.

Personal finance columnist John Crudele offered a similar argument at the New York Post. Crudele observed that "there's no indication that Moody's was any better at spotting the crappy mortgages that were bundled into securities by Wall Street and later sold (or taken over) by the government and taxpayers."

Given that S&P has warned that it could further lower the US's credit rating this year, "is the US taking the offensive against S&P to keep the ratings firm in line at a crucial time in the discussions between Republicans and Democrats over how to handle the nation's debt ceiling and profligate spending ?" Crudele questioned.

When Minyanville asked Aswath Damodaran, a finance professor at the Stern School of Business at New York University, if he thought S&P was being unfairly singled out by the Obama administration, Damodaran declined to comment on the case, but he said in an email reply that the entire saga "is a tempest in a teapot."

"The ratings agencies are guilty of many things but I don't think one of them is fraud," said Damodaran.

While S&P is the only rating agency that has been sued so far, it is also possible that this is merely the Justice Department's opening salvo, and that if the government wins, further lawsuits could come, Robert Piliero, a lawyer at Butzel Long in New York who has worked on structured-finance litigation, told Bloomberg.

Jeffrey Manns, a law professor at George Washington University, concurred, telling CNBC, "This lawsuit is significant because it could augur future government action or, even worse for the agencies, more litigation by investors."

And even if the government does not end up going after Moody's or Fitch, Manns said that "filing a high-profile lawsuit against S&P tells the rating industry at large that the government is serious about holding rating agencies responsible, and that they must be much more careful."

Moody's has certainly felt the impact of the Justice Department's legal action at the markets, if not at the courtroom. In the first two days of the week, the stock plunged $10.26, its largest two-day decline in nearly four years, to close at $45.09 on Tuesday. S&P's parent company, McGraw-Hill, meanwhile, has also seen its shares tumble more than 20% since news of the lawsuit broke.

Twitter: @sterlingwong
No positions in stocks mentioned.
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