Federal prosecutors are stepping up their probe of Standard & Poor’s financial crisis-era ratings of troubled mortgage securities, according to former analysts questioned by prosecutors and another person familiar with the situation.
The probe is focusing on whether the firm’s managers ignored its own standards when assessing the mortgage products in an effort to cater to banking clients eager to sell the securities, according to the former S&P analysts.
At least five former S&P analysts have been contacted by Justice Department officials in recent weeks as part of a civil inquiry into the McGraw-Hill Cos. unit, these people said. Some of the same employees were interviewed multiple times over the last two years, but had not heard from investigators for more than six months. As a result, some of the former S&P employees concluded that the probe had fizzled, with one person stowing notes from the initial conversations in his attic.
Justice Department officials told the former S&P analysts that they aren’t targets of the inquiry. Instead, prosecutors are pursuing the possibility that managers pushed to weaken standards that S&P had set for rating mortgage-linked deals, or in some cases ignored the standards, according to people familiar with the situation.
Flouting the standards is a violation of Securities and Exchange Commission rules. Credit-rating firms are required by regulators to follow their established criteria, which are typically made public so that bond issuers and investors know how deals are being assessed before they get letter grades.
The investigators questioned whether the managers flouted the criteria in order to cater to banking clients, the former analysts said. That is considered a possibility because, in a practice called “ratings shopping,” bankers choose the credit-rating firm that offers the highest rating and threaten to take their business elsewhere if a rating is low.