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U.S. Attorney General Eric Holder leads a news conference to announced that the United States is bringing a civil lawsuit against the ratings agency Standards & Poor's and its parent company, McGraw-Hill Companies, over its pre-fiscal crisis bond ratings.
That's what Matt Nesto and Jeff Macke at Yahoo Finance think, and you can watch them talk about it here.
The timing of the Justice Department's lawsuit against the credit rating agency — alleging that S&P fradulently overrated numerous mortgage-backed securites in the lead-up to the financial crisis — is a tad suspicious, surfacing as Washington is about to enter what could be a fractious debate over sequestration.
Those automatic cuts could begin March 1 if Congress doesn't resolve or delay them. And hanging over the process, like Damocles' sword, is the threat that S&P in particular will downgrade U.S. debt again, repeating an action that it took after the debt ceiling debate in 2011.
The Justice Department filed its 124-page complaint — which contains enough securities-market abbreviations (RMBS, CDO, SVP...) to thrill even the most jaded of finance geeks — in Los Angeles late Monday. Various reports suggest that state attorneys general will follow suit, with California's Kamala Harris and New York's Eric Schneiderman leading the charge.
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NEW YORK, NY - APRIL 21: Pedestrians cross the street by the Morgan Stanley building in Times Square April 21, 2011 in New York City. Morgan Stanley profits fell 48 percent In the first quarter of 2011. (Photo by Ramin Talaie/Getty Images)
How do you think it would feel to be cut not one, not two, but three levels on your credit score? All at once?
If you answered, "Not too good!" then you're in the same boat as Morgan Stanley, one of the last two big independent U.S. investment banks (the other one is Goldman Sachs, and neither are as proud as they once were, after converting themselves to bank holding companies during the financial crisis so that they could get more money from the government). Moody's, one of the three main rating agencies, has said that it may knock Morgan down three notches. It may take other banks, such as Goldman, down two.
The potential downgrades, which may raise borrowing costs and force banks to increase collateral, put the ratings company at odds with bond investors, who are sticking with bets that new capital rules and trading limits will make the financial firms safer in the long run. Funding costs have climbed for banks worldwide as Greece’s debt woes roil markets.
“In the next two years, these big banks will be less robust than they used to be, that’s for sure,” Jim Antos, a Hong Kong-based financial analyst at Mizuho Securities Co., said by telephone. “For any bank that has to raise capital today, it’s already very difficult. This makes it just that much more expensive and difficult.”