Matt Stoller: Standard & Poor’s Predatory Policy Agenda
While it’s useful to think of the ratings agencies as incompetent, or as greedy, it’s important to remember that they have an actual policy agenda. They weren’t just wrong in rating subprime tranches of toxic dreck AAA. They were also pivotal in actively creating the policies that led to the financial crisis.
In the early 2000s, several states attempted to rein in an increasingly obvious predatory mortgage lending wave. These laws, pushed by consumer advocates, would have threatened the highly profitable mortgage securitization pipeline.
S&P used its power to destroy this threat. Josh Rosner and Gretchen Morgenson told the story in Reckless Endangerment.
Standard & Poor’s was the most aggressive of the three agencies, however. And on January 16, 2003, four days after the Georgia General Assembly convened, it dropped a bombshell. Because of the state’s new Fair Lending Act, S&P said that it would no longer allow mortgage loans originated in Georgia to be placed in mortgage securities that it rated. Moody’s and Fitch soon followed with similar warnings.
It was a critical blow. S&P’s move meant Georgia lenders would have no access to the securitization money machine; they would either have to keep the loans they made on their own books, or sell them one by one to other institutions. In turn, they made it clear to the public that there would be fewer mortgages funded, dashing “the dream” of homeownership.
It was an untenable situation for the lenders who had grown addicted to the securitization money spigot. With S&P shutting it off to abusive lenders, it was only a matter of time before the Fair Lending Act was dead.
To Brennan and other consumer advocates, it was a shocking and devastating moment in the battle against predatory lending. “We were stunned when we saw the press release,” Brennan said. “We thought, where does this come from?”
Standard & Poor’s said it was taking action because the new law created liability for any institution that participated in a securitization containing a loan that might be considered predatory. If a Wall Street firm purchased loans that ran afoul of the law and placed them in a mortgage pool, the firm could be liable under the law. Ditto for investors who bought into the pools.
“Transaction parties in securitizations, including depositors, issuers and servicers, might all be subject to penalties for violations under the Georgia Fair Lending Act,” S&P’s press release explained.
It ended with a warning: “Standard & Poor’s will continue to monitor this and other pending predatory lending legislation.” In other words, any states that might have been considering strengthening their predatory lending laws as Georgia did should beware.
That press release is here. S&P was aggressively killing mortgage servicing regulation and rules to prevent fraudulent or predatory mortgage lending.
This is far from the only time S&P has thrown its weight around to advance its financial interests. My favorite story about S&P is how its parent company, publisher McGraw-Hill, tried to cancel Barry Ritholz’s book because he wrote unfavorably about the ratings agencies. When I was on Capitol hill, I actually brought this story up to an S&P lobbyist. She told me about how Ritholz got his facts wrong, that the company has a Chinese wall between the ratings agency and the publisher, and that, besides, he was just a blogger. That’s S&P for you.
Of course, on a larger level, this is not an American story, it’s just the latest iteration of the liquidation of society by international investors. As just one more example, Naomi Klein wrote about S&P and Moody’s being used by Canadian bankers in the early 1990s to threaten a downgrade of that country unless unemployment insurance and health care were slashed. Incidentally, there was an aggressive high end tax cut campaign going on at the time.
The current austerity wave in the US is the same play. The goal of S&P is to ensure that there is a bipartisan set of spending cuts to social programs that benefit ordinary people. That their “downgrade” is being taken seriously by Nancy Pelosi, Barack Obama, John Boehner, Bob Reich, Dick Durbin, and most American political leaders shows that they share this goal. S&P is just doing the lobbying work.
By Matt Stoller, a fellow at the Roosevelt Institute. He is a former financial services staffer to Rep. Alan Grayson


