by Craig Distel
In the aftermath of the financial crisis, the U.S. Department of Justice, along with a number of state agencies, are poised to file civil charges against Standard & Poor’s Rating Service (S&P). Accusations center on fraudulent ratings of mortgage bonds. The Justice Department began its investigation during the summer of 2011 in an effort to determine the causes of the financial crisis. Though the Justice Department and S&P were in settlement negotiations, those talks recently broke down. This would be the first suit against a credit rating agency in response to the financial crisis. The Justice Department reportedly was seeking roughly a $1 billion settlement before the talks broke down. If a judgment reaches that amount, it would eliminate all of last year’s earnings of $911 million of S&P’s parent company, McGraw-Hill.
S&P has apologized that its ratings did not accurately predict the risk of collateralized debt obligations (CDOs) but has denied any wrong doing. S&P claimed that other rating agencies and the United States government all reviewed the CDOs, which were sold as low risk due to S&P’s ratings at the time and featured prominently in the 2008 financial collapse. The Justice Department is attempting to hold S&P responsible for its failure to accurately rate the securities which were never actually low-risk investments. S&P has also pointed to its downgrading of certain securities as proof of its innocence. A spokesperson for the firm stated that the Justice Department’s law suit is merely a case of “hindsight being 20/20” and that the ratings were put forth on a good faith basis. Given what we now know about the complexities associated with the packaging of CDOs, the Justice Department’s allegations may have far reaching effects. A victory for the Justice Department would expose all credit rating agencies to a level of liability they have never experienced. This would, in turn, alter how assets are rated and how they are recommended by financial advisors to their clients. The suit will likely be filed in California, where many have experienced the negative effects of the crash.
Click below for additional information on the dispute between the Justice Department and S&P: