S&P reveals government lawsuit over ratings
By McClatchy Newspapers
Published: Monday, Feb. 4, 2013, 8:58 p.m.
WASHINGTON — Trying to get ahead of a potentially explosive story, credit rating agency Standard & Poor's announced Monday that the Justice Department had informed the company that it's the target of a civil lawsuit for the AAA ratings it gave to complex bonds in 2007 that later turned out to be junk.
In an unusual statement, S&P, a subsidiary of publishing giant The McGraw-Hill Companies Inc., said that the Justice Department would sue the company for failing to predict the full magnitude of the housing bust, something Wall Street banks and federal regulators all missed as well.
Given that S&P issued a historic downgrade of U.S. creditworthiness in August 2011 and has threatened to take that rating down a further notch, the pending suit is raising questions of whether it amounts to retaliation.
At issue are financial instruments called collateralized debt obligations, shorthanded as CDOs — complex bonds, sold to investors in 2007, that pooled mortgages and other consumer and business debt. Investors bought into differing levels of risk and received varying levels of return.
S&P said Monday that it's being unfairly singled out.
“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 (the Justice Department) has cited to us also independently received the same rating from another rating agency,” the company said.
Justice Department spokeswoman Adora Andy declined comment. An S&P official said the company was told it would be charged under the Financial Institutions Reform, Recovery and Enforcement Act. That statute dates back to the savings and loan crisis in the late 1980s and early 1990s.
Ratings agencies historically have enjoyed First Amendment protection under the law, with courts determining that their ratings amount to protected free speech because they reflect opinions about the creditworthiness of an issuer of a bond.
Reporting by McClatchy, later confirmed in Senate hearings and by the special Financial Crisis Inquiry Commission, found that ratings agencies effectively let their lucrative business for rating complex bonds erode the quality of ratings.
Critics of the ratings agencies say a lawsuit is overdue.
“I think that the American public has been hungering for holding the rating agencies accountable for AAA ratings that by any commonsense understanding of the word could not have applied to pools of subprime mortgages,” said Michael Greenberger, a University of Maryland law professor and former financial regulator.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Deputy accused of illegal stops
- Powerful quake shakes N. California; no injuries
- Kansas public school funding unconstitutional
- Flubbed ‘stifling’ finally ends 29-round spelling bee