Standard & Poor's expects lawsuit over
subprime ratings
BBC
Standard &
Poor's says it is to be sued by the US government over the credit ratings
agency's assessment of mortgage bonds before the financial crisis.
The civil
lawsuit would focus on S&P's high ratings in 2007 for some mortgage-backed
securities that later collapsed in value, said the agency.
S&P says the
case is entirely without factual or legal merit.
The suit would
be the first such case over alleged wrongdoing by a ratings agency tied to the
financial crisis.
S&P said the
justice department had informed them of the impending civil suit, although the
federal agency declined to comment.
The move follows
a breakdown in talks between the justice department and S&P, the Wall Street Journal reports.
Several states
are expected to join the suit, US media report.
Shares in
S&P's owner, the US publishing and media group McGraw Hill, fell 14% on
Wall Street on Monday following the announcement, while those in fellow ratings
agency Moody's fell 10% - indicating the market expects that they may be next
in the justice department's sights.
'Key enablers'
S&P and
other agencies have faced criticism from investors, politicians and regulators
for assigning their top AAA ratings to thousands of subprime and other mortgage
securities that later collapsed in value.
Such agencies
are paid by the issuers of bonds and other securities for ratings, raising
concern about potential conflicts of interest.
Grades assigned
by these firms can affect a company's ability to raise or borrow money as well
as how much investors will pay for their securities.
In the case of
the subprime mortgage bubble, ratings agencies including S&P were hired to
assess collateralised debt obligations (CDOs) - complex financial transactions
that packaged together thousands of loans to individual homebuyers.
The ratings
agencies' job was to assess the likelihood that the home loans - and therefore
the CDOs - would ultimately be repaid. Their ratings enabled the investment
banks which put the CDOs together to then sell them to investors around the
world.
In its January
2011 report, the US Financial Crisis Inquiry
Commission called the
agencies "essential cogs in the wheel of financial destruction" and
"key enablers of the financial meltdown".
S&P has
previously disclosed a Securities and Exchange Commission (SEC) investigation
into its rating of a specific $1.6bn (£1bn) CDO known as Delphinus CDO 2007-1.
Delphinus was
the basis of a $127m settlement by Mizuho Financial Group over allegations that
the US unit of the company obtained false credit ratings for the CDO using
millions of dollars in dummy assets.
It is unclear if
Delphinus is included in the expected civil suit.
S&P has also
faced lawsuits from investors, and argues its ratings constitute opinions
protected by the First Amendment to the US Constitution.
The firm says it
"deeply regrets" how its CDO ratings failed to anticipate mortgage
market conditions as the financial crisis hit, and that it has since spent
$400m to help bolster the quality of its ratings.
"Every CDO
that [the department] has cited to us also independently received the same
rating from another rating agency," S&P said in a statement on Monday.
"The
Department of Justice would be wrong in contending that S&P ratings were
motivated by commercial considerations and not issued in good faith."