S&P reveals government lawsuit over ratings
By McClatchy Newspapers
Published: Monday, February 4, 2013, 8:58 p.m.
Updated: Monday, February 4, 2013
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.
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