Eliot Spitzer's successor as attorney general of New York is to emulate his predecessor's dogged pursuit of malfeasance on Wall Street, with an investigation of the credit rating agencies' role in inflating the bubble in the debt markets.
Standard & Poor's and Fitch have received subpoenas from Andrew Cuomo as part of an examination of the mortgage and debt market crisis – and pressure is rising on the agencies from several other quarters too.
The Securities & Exchange Commission confirmed yesterday that it has begun an investigation into the policies and procedures of the credit rating agencies, which grew fat during the credit boom, thanks to fees for rating more and more exotic debt instruments. Their certifications that many credit derivatives based on sub-prime mortgages were as safe as government bonds encouraged investors to buy them in record numbers, but confidence in their creditworthiness has since collapsed, demand has dried up and the agencies have downgraded at least a small proportion of the securities.
Ohio's attorney general, Marc Dann, is also looking at the ways that the rating agencies interacted with the big Wall Street banks who underwrote the sale of mortgage-backed securities and other credit derivatives. The powerful Senate banking committee has also signalled it will call the agencies to testify.
"The more we look at it, the more we realise that these firms are important," Mr Dann told The Wall Street Journal.
The three major credit rating agencies – S&P, Fitch and their rival Moody's – receive fees for certifying the creditworthiness of debt originated by the Wall Street banks. Regulators and politicians are concerned that this represents a conflict of interest, since investor demand is strongest for the highest-rated debt. As criticism mounted last week, S&P replaced its president, Kathleen Corbet, and yesterday the agencies said they would fully co-operate with regulators' requests for information.
Mr Spitzer was elected Governor of New York last year, partly as a result of the reputation he gained in his battles with Wall Street, particularly when he won multi-billion settlements from investment banks over conflicts of interests that arose as the dotcom boom turned to bust. Mr Cuomo's investigation into the mortgage market comes on top of recent campaigns against malpractice in the student loan and sub-prime credit card industries.Reuse content