Justice Department Sues S&P, Alleging Ratings Were Inflated
By: Tory Barringer
The Justice Department (DoJ) and Standard & Poor’s (S&P) are at odds with others over civil fraud charges stemming from an alleged scheme to defraud investors in the lead-up to 2008’s financial meltdown.
The DoJ filed a civil lawsuit against S&P and its parent company, McGraw-Hill, Monday, alleging that S&P “knowingly [issued] inflated credit ratings” for collateralized debt obligations in the years before the crash, misrepresenting their creditworthiness and understating their risks. The department further alleges S&P “falsely claimed that its ratings were independent, objective, and not influenced by the company’s relationship with the issuers who hired S&P to rate the securities in question” when that was in fact not the case.
U.S. Attorney General Eric Holder, speaking at a press conference Tuesday morning, said the DoJ has identified more than $5 billion in losses to federally insured financial institutions resulting from CDOs rated by S&P between March and October 2007. During that period, nearly every mortgage-backed CDO rated by S&P failed.
“Put simply, this alleged conduct is egregious—and it goes to the very heart of the recent financial crisis,” Holder said.
He went on to note that findings from the department’s three-year investigation show that as early as 2003, analysts within S&P raised concerns about the accuracy of the agency’s rating system. Those warnings were ignored, Holder said.
“Even in 2007—when S&P’s internal data showed a severe deterioration in the creditworthiness of the RMBS [residential mortgage-backed securities] it had rated—S&P allegedly continued to rate hundreds of billions of dollars’ worth of CDOs backed by RMBS collateral—ignoring their own analysts’ performance projections showing that the ratings on that collateral would not hold,” the attorney general added.
Holder was joined onstage by other DoJ officials and seven state attorneys general: Beau Biden (Delaware), Kamala Harris (California), James Hood (Mississippi), George Jepsen (Connecticut), Lisa Madigan (Illinois), Tom Miller (Iowa), and Irvin Nathan (Washington, D.C.).
In a release, S&P called the claims “erroneous” and insisted its analysts provided “good-faith ratings in [the] unprecedented U.S. housing market in 2007.”
“A DOJ lawsuit would be entirely without factual or legal merit. It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market—including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained—and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency,” the company said.
S&P added that although it regrets its inability to anticipate the deteriorating conditions in the mortgage market at that time, the agency acted quickly in downgrading the securities included in the CDOs.
In addition, the company called attention to its efforts to improve its systems, governance, analytics, and methodologies in the years following the crash.
“Clearly, we must all do a better job identifying economic trends that could lead to future crises. For their part, governments have established new institutions to identify risks to financial stability, such as the Financial Stability Oversight Council in the U.S. At S&P we have taken to heart lessons learned from the financial crisis and made extensive changes that reinforce the integrity, independence and performance of our ratings, including compliance with today’s enhanced regulatory oversight,” S&P said.
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