A reflection on Standard & Poor’s role in the 2008 financial crisis

November 2019

Jennessa Ong Hui Min

Being a Credit-Rating Agency, Standard and Poor’s “played a critical role in the marketing of risky mortgage-backed securities,”. (Krantz, 2013) Without S&Ps approval, the mortgage-rated securities of AAA ratings would not have been easily marketed and sold to investors. They failed to make unbiased assessments. The consequences of S&Ps was simply a tarnished image and a payment of $1.4 billion settlement with the US Department of Justice. (Temple-West and Prior, 2015).

This is extremely concerning as their power in the financial sector is tremendous. Especially when S&Ps, continues to dominate as one of the top 3 rating agencies in the United States, along with Moody’s and Fitch Group. (Council on Foreign Relations, 2015) As the saying goes, with great power comes great responsibility. How much of this power is used for the betterment of society and how much of this power is used for their own interests? Who is to say that the shortcomings of their business model will not result in something similar happening again? According to Matt Krantz from USA Today, he suggests that the problem can happen again because of credit-agencies reliance on financial histories and are incentivised to close an eye on for the purpose of business. Moreover, he adds that investors depend too much on these agencies. Since the Financial Crisis, there have been some reforms within the credit-rating agencies, but little has been done on their corporate culture. (Zaidi et al., 2016).

This has to change. The Financial Crisis is a lesson that there is a need for these agencies to change their business model, there is a need for government interventions to regulate these oligopoly agencies and the banking industry in general- especially when it has a huge impact on society. In my personal opinion, these were not unprecedented consequences, justice was not served to the innocent people affected. The top 1% knew what they were doing, they knew the risk, but they still went along with it. The innocent who believed in the credibility of these firms, place their entire life savings on these securities, only to be crushed by the reality that these were all fake- trillions of dollars disappeared and millions of people lost their jobs and homes. While the banks happily took the people’s money and use it to pay themselves. In the first place, the government should have socio-economic policies and regulations set from the beginning. The firms involved, of whom have a duty to be aware of the risk and prevented the offence, owe it to their clients to pay what is due. (Gobert and Pascal, 2011) Moreover, with S&Ps, their intentions; mens rea, and actions were indeed for self-interest, to profit. Taking an organic view, these organisations might not have a moral responsibility but they do have a practical responsibility not to commit the offence, of which they failed to do so. (Wolf, 1985) Therefore, these firms should be charged with a heavier penalty. New laws need to be effectively put in place to charge organisations under criminal law and not just civil law. These organisations with power need to realise their faults, do everything they can to make up for the damage and prevent something like this from happening again; instead of blaming the immigrants and poor for the cause.

References

Council on Foreign Relations. (2015). The Credit Rating Controversy. [online] Available at: www.cfr.org/backgrounder/credit-rating-controversy [Accessed 28 October 2019].

Gobert, J. and Pascal, A. (2011). European developments in corporate criminal liability. London: Routledge, pp.139-155.

Krantz, M. (2013). 2008 crisis still hangs over credit-rating firms. [online] Eu.usatoday.com. Available at: eu.usatoday.com/story/money/business/2013/09/13/credit-rating-agencies-2008-financial-crisis-lehman/2759025/ [Accessed 28 October 2019].

Temple-West, P. and Prior, J. (2015). Government settles with S&P for $1.4 billion in financial crisis case. [online] POLITICO. Available at: www.politico.com/story/2015/02/standard-poors-settlement-justice-department-114857 [Accessed 28 October 2019].

The Big Short. (2015). [DVD] Directed by A. McKay. Hollywood: Paramount Pictures.

Wolf, S. (1985). THE LEGAL AND MORAL RESPONSIBILITY OF ORGANIZATIONS, [online] 27, pp.267-286. Available at: www.jstor.org/stable/24219391 [Accessed 28 October 2019].

Zaidi, D., Wang, M., Hall, K. and Fitzgerald, A. (2016). The Indisputable Role of Credit Ratings Agencies in the 2008 Collapse, and Why Nothing Has Changed. [online] Truthout. Available at: truthout.org/articles/the-indisputable-role-of-credit-ratings-agencies-in-the-2008-collapse-and-why-nothing-has-changed/ [Accessed 28 October 2019].