The US Department of Justice (DoJ) has filed a lawsuit against Standard & Poor’s (S&P), claiming that the credit ratings agency’s (CRA) analysts issued overly positive reviews of mortgage-backed securities before 2008, which contributed to the worst financial crisis since the Great Depression.
The civil lawsuit against S&P was filed in a Los Angeles federal court; one of the worst-hit regions by the boom-to-bust cycle that hit the US housing market. The post-2007 crash has seen many Californians either lose their home to foreclosure or suffer substantial losses as property values plummeted.
According to press reports, the action follows a breakdown of talks between S&P and prosecutors on the amount of compensation required to avoid a lawsuit. S&P has argued that its ratings are essentially opinions and therefore protected under the First Amendment to the US constitution, guaranteeing freedom of expression.
The CRA has already faced other lawsuits related to its ratings from investors and the states of Illinois and Connecticut. In addition to the DoJ, several other state attorney generals are believed to be investigating S&P, while states such as California and New York are likely to pursue their own investigations and legal action. Goldman Sachs faced similar legal action over its infamous ‘Abacus’ collateralised debt obligation (CDO) instrument, which was awarded an AAA rating.
“S&P deeply regrets that our CDO ratings failed to fully anticipate the rapidly deteriorating conditions in the US mortgage market during that tumultuous time,” the agency said in a statement. “However, we did take extensive rating actions in 2007.
“With 20/20 hindsight, these strong actions proved insufficient – but they demonstrate that the DoJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith,” the CRA added.
“It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including US officials, who in 2007 publicly stated that problems in the subprime market appeared to be contained – and that every security that the DoJ has cited to us also independently received the same rating from another agency.”
Shares in publisher McGraw-Hill, S&P’s parent company, fell sharply on the news of the suit, as did those of rival CRA Moody’s, although it was not named in the DoJ lawsuit. More treasurers are still angry about the worthless AAA ratings given to many investment products prior to the 2008 crash.
Commenting on the civil action, Matthew Allen, a partner at law firm Eversheds, said: “Assigning any kind of accountability for the financial crisis has seemed out of reach until now. However, the US federal case brought against S&P suggests there could be substance in the widely-held belief that agencies may not always have acted with the most holistic of motives.
At the very least, these investigations are likely to accelerate structural and governance change in the industry so as to put the all important rating process on a sounder and more transparent footing.”
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