- Last Updated: 2:07 PM, February 6, 2013
- Posted: 11:20 PM, February 5, 2013
Uncle Sam is alleging that the country’s No. 1 ratings agency’s standards were poor.
The Justice Department is seeking as much as $5 billion in penalties from Standard & Poor’s for alleged “egregious” wrongdoing in grading mortgage bonds.
US Attorney Eric Holder, flanked by a half-dozen state attorneys general, yesterday announced a lawsuit against the McGraw-Hill unit, charging that S&P “misled” investors and was ridden with conflicts of interest that influenced its ratings on roughly $4 trillion in mortgage-backed bonds as far back as 2004.
For its service, S&P raked in revenues of about $1 billion since 2005, it is alleged.
“The action we announce today marks an important step forward in the [Obama] administration’s ongoing efforts to investigate — and punish — the conduct that is believed to have contributed to the worst economic crisis in recent history,” Holder said.
The up to $5 billion in penalties that the suit seeks dwarfs the $550 million Goldman Sachs paid in 2010 to settle regulatory charges related to mortgage bond fraud.
Up to now, that is the single highest penalty to spring out of the US mortgage meltdown.
“At all times, our ratings reflected our current best judgments about RMBS [residential mortgage-backed securities] and the CDOs [collateralized debt obligations] in question, said an S&P spokeswoman.
“Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected,” she noted, adding that the agency plans on “defending itself vigorously.”
Word that S&P would get sued over its ratings first surfaced on Monday. Over two days, McGraw-Hill shares have tanked 23 percent — wiping out $3.7 billion of market value.
The District of Columbia and 16 states, including Mississippi, Missouri, Illinois, North Carolina , Delaware, Pennsylvania and California, are party to the suit.
S&P, according to the 128-page suit, “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in” the rating of complex mortgage bonds known as residential mortgage backed securities.
The ratings firm also doled out bad ratings on more complex mortgage instruments known as CDOs, it is alleged.
“In issuing these CDO ratings, S&P deceived financial institutions that invested in these CDOs into believing that S&P’s ratings reflected its true current opinion regarding the credit risks of these CDOs, when in fact they did not,” the lawsuit alleges.
Financial firms such as California-based Western Federal Corporate Credit Union suffered more than $5 billion in losses, the suit alleges.
Reports indicate that S&P balked at paying a $1 billion penalty to the Justice Department about two weeks ago — which led to yesterday’s public bashing.
At the press conference yesterday, Holder and Deputy US Attorney Tony West hinted that Justice is not ruling out going after other ratings firms including Fitch Ratings and Moody’s Investors Service.