Reform of the financial services industry has been slow to come and it is especially true for credit ratings agencies, which have so far come out unscathed from the crisis.
But with the lawsuit against Goldman Sachs regarding the marketing of toxic collateralized debt obligations that received the blessings of ratings agencies, the complacency could soon be gone.
The CDO, dubbed Abacus, was one of the worst on Wall Street, yet it received triple-A ratings from credit agencies. The assets in the CDO were chosen by Paulson & Co., a hedge fund, which also bet against the demise of the CDO through credit default swaps.
"Less than a year after the deal was completed, 100 percent of the bonds selected for Abacus had been downgraded," wrote the Wall Street Journal Tuesday, citing a February 2008 report by Wachovia Capital Markets. That was a fate that only two other such deals suffered around that time, it added.
So if Goldman Sachs is found having misled investors, the integrity of credit ratings agencies will be questioned too, since they receive fees by issuers for granting ratings.
And if the lawsuit against Goldman Sachs starts snowballing and impacting Goldman's credit, ratings agencies are likely to lag in adjusting their ratings, which will once again expose the cracks in the ratings system.
Ratings agencies so far have said that the charges by the Securities & Exchange Commission against Goldman won't have a material impact on the bank's financial profile or rating. Yet, CDS on Goldman and on the banking sector as whole have been spiraling wider, signaling investors' concerns that the situation could get worse. For example, Goldman's CDS have been trading like a triple-BBB company, although it is rated in the single-A category.
Congress is already showing signs of revisiting ratings agencies' role in the financial crisis. Sen. Carl Levin (D-Mich.), said Monday that a Senate investigative committee will launch an inquiry into credit ratings agencies and investment banks and their roles in the crisis, according to Politico. It added that top officials from Moody's Investors Service and Standard & Poor's, as well as Goldman CEO Lloyd Blankfein are expected to testify.