From today’s NYT blog “The Upshot” by Neil Irwin:
Is income inequality holding back the United States economy? A new report argues that it is, that an unequal distribution in incomes is making it harder for the nation to recover from the recession and achieve the kind of growth that was commonplace in decades past.
The report is interesting not because it offers some novel analytical approach or crunches previously unknown data. Rather, it has to do with who produced it, which says a lot about how the discussion over inequality is evolving.
Economists at Standard & Poor’s Ratings Services are the authors of the straightforwardly titled “How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide.” The fact that S&P, an apolitical organization that aims to produce reliable research for bond investors and others, is raising alarms about the risks that emerge from income inequality is a small but important sign of how a debate that has been largely confined to the academic world and left-of-center political circles is becoming more mainstream.
Read the entire article here.
This week the Justice Department announced a civil lawsuit against the credit rating agency Standard & Poor’s after a lengthy investigation. The suit alleges that the agency issued faulty credit ratings for securities tied to the “toxic assets” of mortgages and other financial instruments. The Justice Department claims that S&P’s purposely engaged in fraud by diluting their rating standards in order to generate business and accommodate long-standing clients.
The suit is being brought under a law passed in 1989 after the savings and loan crisis. The statutes in the Financial Institutions Reform, Recovery, and Enforcement Act make it easier to prosecute fraud cases against financial institutions. Since the case is civil it only requires the plaintiffs to show by a preponderance of evidence that S&P engaged in fraudulent activity such as giving subprime mortgages inflated credit ratings during the financial crisis. For example, the company rated numerous mortgage-backed securities highly, only to downgrade those same the securities quickly, leading to massive defaults in the final few months of 2007.
Then there is the usual array of inappropriate e-mails and text messages. One riffs on the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” Another e-mail from an analyst in response to a question about how his new job was going reads: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.”
The complaint also included numerous emails from executives at the agency that Justice Department officials claim are proof that they knowingly inflated credit ratings and engaged in misconduct by deceiving investors. However, critics see a weakness in their case as other credit ratings agencies have not been sued, and since many of their ratings were the same as S&P’s, it is unclear whether executives will be able to say that they followed the lead of other third-party agencies such as Fitch and Moody’s. Given the industry-wide pattern of misinformation and risky behavior, the Justice Department’s suit is an important step in rectifying the egregious abuses of executives and companies in the financial world.