S&P Expects U.S. Lawsuit Over Its Mortgage Ratings

Standard & PoorBy DANIEL WAGNER and MARCY GORDON

WASHINGTON -- The U.S. government is expected to file civil charges against Standard & Poor's Ratings Services, alleging that it improperly gave high ratings to mortgage debt that later plunged in value and helped fuel the 2008 financial crisis.

The charges would mark the first enforcement action the government has taken against a major rating agency involving the worst financial crisis since the Great Depression.

S&P said Monday that the Justice Department had informed the rating agency that it intends to file a civil lawsuit focusing on S&P's ratings of mortgage debt in 2007.

The action does not involve any criminal allegations. Critics have long complained about the government's failure to bring criminal charges against any major Wall Street players involved in the financial crisis. Criminal charges would require a higher burden of proof and carry the threat of jail time.

If S&P is eventually found guilty of civil violations, it could face fines and limits on how it does business.

S&P denies any wrongdoing and says any lawsuit would be without merit.

A federal lawsuit would "disregard" the fact that S&P reviewed the same data on risky mortgages as U.S. government officials, who said publicly in 2007 that the problems in the subprime mortgage market appeared to be limited, the company said in a statement.

In the statement, S&P said it "deeply regrets" that its ratings on some securities "failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time."

Justice Department spokeswoman Nanda Chitre declined to comment on the matter.

According to a report in the New York Times, the lawsuit will likely be brought this week after settlement talks between the Justice Department and S&P broke down last week. The talks collapsed over federal authorities' insistence that a settlement involve at least $1 billion, the Times reported.

Judges have previously thrown out claims brought by investors against the rating agencies, on the grounds that their ratings amount to free speech protected by the First Amendment.

But that argument hasn't always succeeded in cases involving investments like those in the expected S&P suit, according to research by The Brattle Group, a consulting firm. That's because those ratings weren't published widely, as most bond ratings are. As a result, several courts have ruled that those ratings do not enjoy free-speech protection.

S&P is a unit of New York-based McGraw-Hill Cos (MHP). McGraw-Hill's stock plunged nearly 14 percent Monday after reports surfaced about the government's expected lawsuit.

Moody's Corp. (MCO), the parent of Moody's Investors Service, another rating agency, closed down nearly 11 percent. The two companies' stocks suffered the biggest percentage drops in the S&P 500 index, which finished down slightly more than 1 percent.

S&P, Moody's, and Fitch Ratings, the third major rating agency, have been blamed for helping fuel the financial crisis by assigning AAA ratings to trillions of dollars in risky securities backed by subprime mortgages. The securities collapsed once the housing bubble burst and home-loan delinquencies soared. Major U.S. banks absorbed tens of billions in losses.

The rating agencies are important arbiters of the creditworthiness of securities traded around the world. The grades they assign can affect a company's ability to raise or borrow money and how much investors will pay for securities it issues.

The securities in the anticipated federal lawsuit are collateralized debt offerings. CDOs are investment vehicles that contain many underlying mortgage loans.

A CDO generally gains in value if borrowers repay. But a wave of defaults can cause them to tumble in value. Soured CDOs contributed to, and intensified, the financial crisis.

Critics have long argued that rating agencies have an inherent conflict of interest: They're paid by the same companies whose products and credit they rate. The agencies have been accused of issuing unduly high ratings before the crisis, in part because of pressure from banks they desired as clients.

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7 Comments

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mornewz

the art and science of separating suckers from their money

February 05 2013 at 7:18 AM Report abuse rate up rate down Reply
Warrior

Any coincidence this legal action has anything to do with the stock market doing so badly today? Why wasn't legal action taken "before" the election? If the good old boy networks want to buy politicians properly; they can't rely solely on unlimited campaign contributions and lobbyist firms. Will the good old boy network "protection associations" be able to prevent "CRIMINAL" charges, the way they usually do with cleverly placed loopholes, ambiguities, and vagueness of laws when politicians manipulate legislation with their back room deals? Knowing how Wall Street continues to do business as usual with Washington, D.C.; my guess is they will once again be caught doing things "unethical, but legal!" They will also continue to slide more hidden agendas into the next "fiscal cliff" and "debt ceiling" legislation, too. Let's just hope that any aid for typical Americans, like Sandy Relief, doesn't somehow get overlooked like it did the last time. Also, let's stop threats against typical Americans citizens Social Security, Medicare and Medicaid; and, go after these criminals who say they can't pay taxes; but, can buy elections.

February 05 2013 at 12:46 AM Report abuse +1 rate up rate down Reply
ATM

S&P was correct - the United States has mismanaged money, and has probably a junk rating except that it has the best military.

They have already become illiquid and need China in order to finance the current budgets for the Government.

They should have had their credit rating powered decades ago - then maybe the Government would have gotten its financial house in order.

February 04 2013 at 8:19 PM Report abuse rate up rate down Reply
ATM

Screw that -

First they should sue the FICO scoring and Experian, Transunion,and Equifax for the damges done on tax paying Americans while the financial crisis took place.

It was a joke - lowering FICO scores after credit card companies lowered access to credit based on their own mismanagement!

Just goes to show how corrupt and how much the US Govet is using threats to shut down those that speak out...

By the way , why did we hear about Israels successful disruptionof IRAN's nuclear facilities 6 weeks after it took place?

Our Government is also secretive and manages information very carefully.

February 04 2013 at 8:15 PM Report abuse +1 rate up rate down Reply
alderaforall

civil charges? That's all the government can come up with? Where are the criminal charges, lengthy jail sentences, loss of all property/money gained through their actions, you know everything you, me and any other average person would have to suffer for doing things like this. If I rob a bank I can expect years of jail time, when banks rob us the government wants to throw a few fines around, call the bankers to Washington for a hearing. Un Fing believable.

February 04 2013 at 6:15 PM Report abuse rate up rate down Reply
vettura

If they are protected by The First Amendment then why were they charging for the service they provided. They service, had a predermined value acquired in the public trust therefore, they cheated their custumers and ultimatel, us all.

February 04 2013 at 4:28 PM Report abuse -1 rate up rate down Reply
sharpsguy

Both S&P and Moodys are tightly tied to the financial meltdown caused by those "derivitives" cobbled together by greed-laden banking as well as Wall Street moguls to feather their own nests as well as those of "Politically-Connected" pals in high finance. These crooks pushed those toxic packages onto even greedier banks in Europe, leading to their own Nudge, nudge, wink, wink! catastrophic Tsunami of worthless paper. And, STILL, nobody has gone to prison, thanks to close ties to our illustrious "government" officials! Nudge, nudge, wink, wink. And, the band played on........

February 04 2013 at 4:11 PM Report abuse +2 rate up rate down Reply
madmaxt11

The credit ratings agencies are a complete joke. They've proven to the world they are absolutely worthless with 0 credibility.

February 04 2013 at 3:10 PM Report abuse rate up rate down Reply