Feds sue S&P over mortgage ratings
The Justice Department late Monday filed civil fraud charges against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck.
Los Angeles Times
LOS ANGELES — The federal government is embarking on one of its most ambitious efforts to assign blame for the financial crisis, going after Wall Street’s biggest credit-rating firm for its role in pumping up the housing bubble.
The Justice Department filed a civil lawsuit late Monday in Los Angeles federal court against Standard & Poor’s. The suit accuses S&P analysts of issuing glowing reviews on troubled mortgage securities whose subsequent failure helped cause the worst financial crisis since the Great Depression.
The action marks the first federal crackdown against a major credit rater, and signals an untested legal tack after limited success in holding the nation’s banks accountable for the part they played in the crisis.
The government selected Los Angeles as the place for the suit in part because it was one of the regions hardest hit when the bottom fell out of the housing market. Hundreds of thousands of California residents lost their homes to foreclosure, and others saw their wealth evaporate as home values plunged.
“The DOJ is playing hardball and they’re coming at the ratings agency in a very different direction with a potentially very powerful weapon to push S&P to the settlement table,” said Jeffrey Manns, a law professor at George Washington University.
In addition to the Justice Department, several state attorneys general are investigating the ratings agency. States such as California and New York are expected to pursue their own legal action, people familiar with the matter said.
The federal action does not involve any criminal allegations. Critics have complained the government has yet to send any senior bankers or Wall Street executives to jail for potential illegal behavior that led to the crisis.
But civil actions typically require a much lower burden of proof.
Investors rely in part on rating agencies to decide what stocks, bonds or other securities to buy based on the agencies’ recommendations about their safety.
The three major raters — S&P, Moody’s Investors Service and Fitch Ratings — have all been criticized for giving perfect AAA ratings to complex bonds in 2007 that later turned out to be nearly worthless.
S&P and the government were reportedly in settlement talks that broke down the past week. The ratings firm could face hundreds of millions of dollars in fines and new restrictions on its business model if found liable of civil violations.
S&P, a unit of publisher McGraw Hill, denounced the lawsuit in a detailed and strongly worded response. The company said the claims were unjustified, adding it acted in “good faith” to warn the world about some of the securities that went belly up.
The rating firm has steadfastly maintained it was protected under the First Amendment to state an opinion about certain financial products. That argument may not hold up if federal or state investigators are able to prove the ratings agency knowingly gave improper evaluations.