Data provided by iNet BFA
Loading...
See More

US sues S&P over inflated ratings

Feb 06 2013 09:26 AFP

(Brainerd Dispatch, Steve Kohls/AP)

Related Articles

S&P cuts Egypt rating on political strife

S&P sounds warning on AngloGold

S&P downgrade worries Eskom

S&P cuts SA’s foreign currency rating

S&P downgrades Spain two notches

S&P downgrades Telkom

 

New York - The US Justice Department said on Tuesday it is seeking at least $5bn in civil penalties from Standard & Poor's for losses due to inflated ratings of mortgage bonds.

Announcing a suit against S&P and its parent, The McGraw-Hill Companies, Attorney General Eric Holder said the powerful rating agency knowingly exaggerated the ratings on financial securities, misrepresenting their true credit risk.

"Put simply, this alleged conduct is egregious - and it goes to the very heart of the recent financial crisis," said Holder, flanked by justice officials from several states joining the suit.

"Today's action is an important step forward in our ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history," he said.

The suit cited S&P's top-grade ratings of dozens of mortgage-based collateralsed debt obligations (CDOs) issued in early 2007 that were in default within one year, some within six months.

The defaults dealt billions of dollars in losses to financial institutions insured by the US, some of which collapsed in the 2008 crisis and others, like Citigroup, forced to seek a government bailout.

"At the very least, we believe conservatively that S&P's actions make it liable for more than $5bn in civil penalties," said US Acting Associate Attorney General Tony West.

S&P called the lawsuit "entirely without factual or legal merit," and an S&P lawyer hinted that it was political retribution for the agency's historic downgrade of the US credit rating from triple-A status in August 2011.

"Is it true that after the downgrade the intensity of the investigation significantly increased? Yes," Floyd Abrams, an attorney representing S&P, said on CNBC television.

"I'm sure the government would say it has nothing to do with it."

Holder, in a news conference, said there was "no connection" between the S&P downgrade and the litigation.

The suit, filed in California and backed by a number of state governments, accused the credit rater of knowingly inflating its ratings on CDOs and residential mortgage-backed securities in 2007 in order to win revenue from issuers.

S&P was specifically charged with wire fraud, mail fraud and financial institution fraud.

The suit cited internal communications in which S&P considered the need to update its analytic models to keep up with the securities in the changing market, only to continue with the weaker models that permitted higher ratings to go through.

S&P's modus operandi was to "limit, adjust and delay those updates" to favor issuers and "maintain and grow S&P's market share and profits," the complaint alleges.

S&P staff debated how many securities to downgrade as more of the loans came up delinquent and the housing market began to sink.

As the troubles became more widely apparent, one S&P analyst likened the situation to "Burning Down the House" in an email, satirizing the market problems with mock lyrics of the famous Talking Heads song.

"Strong market is now much weaker. Subprime is boi-ling o-ver. Bringing down the house."

But at the same time, S&P continued to rate new CDOs "without making adjustments to account for continuing deterioration" in the investments, the complaint alleges.

S&P said the Justice Department took statements from internal communications out of context.

"There was robust internal debate within S&P about how a rapidly deteriorating housing market might affect the CDOs - and we applied the collective judgment of our committee-based system in good faith," S&P said.

"The email excerpts cherry-picked by DOJ have been taken out of context, are contradicted by other evidence, and do not reflect our culture, integrity or how we do business," S&P continued.

S&P also argues that it was far from alone in its failure to predict the scale of the housing collapse.

But the government has not taken any action against S&P's competitors. Moody's remained quiet on the subject Tuesday, while Fitch told AFP that it has "no reason to believe Fitch is a target of any such action."

S&P is a unit of McGraw-Hill, whose shares fell 10.7% on Tuesday after losing nearly 14% on Monday. Moody's lost 8.8%.

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.

standard and poor's
NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Add your comment
Comment 0 characters remaining
 

Company Snapshot

We're talking about:

Small Business

A cash flow crunch often occurs in small businesses trying to balance cash coming in with cash going out. Watch this video to help you improve.
 
 

How you get trapped by debt

Borrowing money is so quick, so easy - and so deadly, says Susan Erasmus.

 
 

Start saving...

Time the key for retirement saving
Dummy's guide to saving
Save money with affordable account
All about endowments

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...
Loading...