In 2008 the United States suffered a terrible recession, one of the worst in our history. Now that we are on the path to recovery, the government is asking: who is to blame? Lots of banks and financial institutions have been sued, usually by the SEC, for their role in the financial collapse. Most have settled quickly, and moved on.
This week the government filed its lawsuit against Standard & Poor’s Rating Service, commonly known as S&P. The complaint alleges that S&P knew that the housing market was collapsing, but failed to downgrade its ratings of the securities that consisted of bundled subprime mortgages. The lawsuit is backed up by interesting evidence, including several internal emails at S&P by employees making light of the housing crisis. One went as far as to refer to the Talking Heads song “Burning Down the House.” People say the stupidest things in emails, don’t they?
In many ways the government’s claim relates to negligence, which is what we are studying now in LA245. Although the government is alleging intentional action (or inaction) by S&P, the lawsuit is at its heart asking who we can blame for the harm. With the collapse of the economy, that is a very complicated question to answer. Nonetheless, both sides are so far gearing up for a long court battle, and insisting they won’t settle.
So what do you think? Can we blame the rating services for the financial collapse? If they had changed their ratings sooner would we have escaped financial distress?
2 Comments
Haiyan(Karen) Lin posted on February 7, 2013 at 12:34 pm
I think we can not only blame the rating services because “Rome wasn’t build in a day”. Of course, the rating services should degrade the rating when they found the subprime mortgages market become bad. I also think that if they degrade it earlier, then fewer people will continue to buy the house with mortgages. Additionally, I think the living styles for American also is another reason that lead to this problem. Normally, Americans do not have that much savings compare with Chinese, which makes them have fewer chance to repay the mortgages. Also, many banks that give out the mortgages do not really confirm borrowers’ credibility to have the mortgages when the time the economic seems good. I think all these reasons and many other reasons together lead to the financial collapse.
Yujing Cai posted on February 20, 2013 at 7:38 pm
I don’t know if their impact of downgrading the housing market, but S&P lowered the US’s sovereign long-term credit rating from AAA to AA+ in August 2011, and this action did have a great impact in the international finance world.
Since S&P is such a prestige company greatly trusted by investors for their evaluation, it has the responsibility and ethics to make the most accurate evaluation. However, it may be the case that the housing market wasn’t so bad that it didn’t think degrading is necessary. Even if it made a false judgement, there are plenty of other companies and other entities to blame. What about the government itself for failing to deal with the housing problem?