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US govt sues S&P over pre-crisis mortgage ratings

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Credit ratings agency Standard & Poor’s is being sued by the US government over allegations it understated the risks of instruments that led to the financial crisis.

The US Department of Justice filed a complaint against S&P and its parent company McGraw Hill yesterday, saying it was seeking civil money penalties and accusing the two groups of mail fraud, wire fraud and financial institutions fraud.

S&P, along with fellow ratings agencies Moody’s and Fitch, have faced criticism from investors and policymakers over the high ratings they gave to subprime and other mortgage-backed securities which eventually caused the credit crisis when they soured.

The DoJ’s filing says: “S&P’s desire for increased revenue and market share in the [residential mortgage-backed securities] and [collateralised debt obligations] ratings markets led S&P to downplay and disregard the true extent of the credit risks.”

The charge, carried out under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, is the federal enforcement action against a credit ratings agency over acts linked to the financial crisis.

In a statement, S&P says it will fight the charges and cites previous court rulings which dismiss challenges to the opinions of ratings agencies.

“A DoJ lawsuit would be entirely without factual or legal merit,” S&P says.

“It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market, including US government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I’m no fan of the ratings agencies and the exalted status that their opinions enjoy but to absolve investors of all blame creates a moral hazard “par excellence”.

    When do investors take some responsibility?

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