This week’s Department of Justice “catch of the week” goes to Standard & Poor’s Financial Services (S&P). On Tuesday, the ratings giant, along with its parent corporation McGraw Hill Financial Inc., agreed to pay $1.375 billion to settle charges it schemed to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The agreement resolves lawsuits brought by the DOJ and 19 states (plus DC) and represents the largest penalty of its kind ever paid by a ratings agency. See DOJ Press Release.
According to the government, S&P falsely represented that its ratings of RMBS and CDOs were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities. Instead, S&P issued inflated ratings that misrepresented the securities’ true credit risks causing RMBS and CDO investors to incur substantial losses. Specifically, S&P admitted issuing positive ratings on these securities despite its recognition investor losses were probable, and doing so to protect its business relationship with the banks issuing the securities.
In announcing the record-breaking settlement, the government was clear it was holding S&P responsible for what it viewed as the rating agency’s major contribution to the financial crisis. Acting U.S. Attorney for the Central District of California Stephanie Yonekura stated:
“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk. Driven by a desire to increase profits and market share, S&P blessed innumerable securitizations that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off. This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone. This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”
Attorney General Eric Holder was equally forceful in his remarks: “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business. While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”
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