US Government To Sue S&P Over Pre-Subprime Crisis Ratings: Report
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The U.S. Justice Department is preparing to file civil charges against the nation’s largest credit-ratings agency, Standard & Poor’s, for over-inflated mortgage ratings leading to the 2007 subprime crisis, reported the New York Times on Monday.
The U.S. Justice Department is preparing to file civil charges against the nation’s largest credit-ratings agency, Standard & Poor’s, for over-inflated mortgage ratings leading to the 2007 subprime crisis, reported the New York Times on Monday.
The case, expected to be file as early as next week, will mark the first enforcement action that the government has taken against a major rating agency, with more than a dozen state prosecutors are expected to join the federal suit.
According to an S&P statement, the rating agency was informed of the possibility of a civil lawsuit as far back as three years ago, though they claimed to have acted in good faith when issuing the ratings.
“A D.O.J. lawsuit would be entirely without factual or legal merit,” said the company, noting that other major competitors, notably Moody’s and Fitch, had given the exact same ratings to the securities involved; while US government officials themselves had said publicly in 2007 that the problems in the subprime mortgage market appeared to be limited.
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[quote]The Justice Department “would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith,” the company added.[/quote]The civil case will reportedly focus on about 30 collateralized debt obligations (CDOs), which were created in 2007 – at the height of the housing boom. According to NYT, S&P was paid $13 million to rate them.
S&P now says that it “deeply regrets” that some of its ratings “failed to fully anticipate the rapidly deteriorating conditions in the US mortgage market during that tumultuous time.”
However, settlement talks between the rating agency and the Justice Department broke down over the last two weeks, said sources, after prosecutors sought damages in excess of $1 billion, while insisting that the company issue an admission of guilt.
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If S&P is eventually found to have committed civil violations, it could face fines and limits on how it does business. Additionally, the company could also expose itself to further liability in numerous other civil cases if found guilty.
Meanwhile S&P’s rivals declined to comment on the rating agency’s troubles. A spokesman for Fitch, Daniel J. Noonan, told NYT that his firm could not comment on an action that appeared to focus on their rival; though he added that “we have no reason to believe Fitch is a target of any such action.”
