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The Talking Heads, DOJ and S&P

Throw together the Talking Heads, Standard & Poor’s, Attorney General Eric Holder and what do you get? A lawsuit, of course. Today Holder announced the Justice Department is suing S&P over its rosy ratings of dubious investments. Holder says those ratings were at the “very heart” of the financial crisis.

The Justice Department says S&P knew its ratings of investments made up of shaky mortgages were misleading. As proof, it points to a video of an analyst singing a song he wrote about the tanking housing market -- set to the Talking Heads song, “Burning Down the House.” The Justice Department wouldn’t share the video with us. So one of Marketplace's engineers, Bill Lancz, grabbed a mic and the doctored lyrics: "Housing market went softer/Cooling down/Strong market is now much weaker/Subprime is boi-ling o-ver/Bringing down the house.”

Could any ripple effects from this lawsuit reach your house? Bill Chambers says, possibly. He used to work at S&P and now teaches finance at Boston University. He says if S&P lost and went under, the other two major rating agencies could decide to get out of the business. Chambers says without them, you’d have fewer bond funds to choose from in your 401(k) plan, because fund managers would shy away from unrated bonds.

“I think there would be some fewer funds and the ones that existed wouldn’t have the same variety to choose from as well,” Chambers says.

David Wyss used to be S&P’s chief economist; he now teaches at Brown University. He says the cost of borrowing would go up if rating agencies weren’t around to give a borrower a stamp of approval. Banks would have to pay more to borrow the money they lend to consumers. And, Wyss says, that would trickle down to you and me.

“It’s going to be harder for folks to get a mortgage and it could even affect things like credit cards, car loans,” say Wyss.

Mike Tae is an investment advisor with Millstein and Co. He says consumers needing jumbo loans to buy a house would have to pay much higher interest rates.

He explains, “It would ultimately ultimately flow down to jumbo borrowers as well as normal, mom and pop consumers of mortgages as well.”

So, it might be worth paying attention to the S&P lawsuit. Even if you’re a Talking Heads fan.

About the author

Nancy Marshall-Genzer is a senior reporter for Marketplace based in Washington, D.C. covering daily news.
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The article does a good job of scaring Americans of the risks to them (More expensive mortgages) if the Justice Dept suit is successful. But the perspective that is missing is what happens if the bond rating agencies are all frauds in the hands of the banks and Wall Street? What we have already seen is that when they fail to do their job, the housing market can collapse. Who other than the Justice Dept is supposed to keep them accountable? As is some times the case with these types of stories it seems to end with a whimper of "there is not any good that can come of it" rather than a clear call for everyone in every institution to do what is right so we all can do better.

This is a very poorly thought-out piece. Are you really saying that the health of the bond market requires fraud by rating agencies? S&P makes hundreds of millions per year from it's ratings business. Even if the company went out of business from this suit (which it won't) another company would scoop up this very lucrative business. It's amazing that you could find supposed experts who would really support the position that somehow cleaning up the rating agencies is bad for the bond business. I wonder how you edited their comments and whether they have seen how you used them. This is extremely poor journalism...and another example of your snarky bias against anything initiated by the current administration.

This story is dramatically one sided - economically speaking. Let's say everything pans out exactly as the worse predictions in the story: S&P looses big time, scares the other two ratings agencies and now no one will rate mortgages - or other bonds.
If the flow of money is constrained by lack of ratings agencies while the supply and demand remain constant there will be another solution before very long. Neither the lenders nor the borrowers can afford to not find a new solution. You are only looking at the disruptions which perhasp the market needs.
S&P has behaved with at least criminal negligence and perhaps worse (my opinion) and they deserve to be prosecuted.

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