Standard & Poor's expects lawsuit over subprime ratings

BBC News, 4 February 2013

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S&P says it "deeply regrets" how its
CDO  ratings failed to anticipate
mortgage market conditions

Standard & Poor's says it is to be sued by the US government over the credit agency's rating of mortgage bonds before the financial crisis.

The civil lawsuit would focus on S&P's high ratings in 2007 for some mortgage-backed securities that later collapsed in value, said the agency.

S&P says the case is entirely without factual or legal merit.

The suit would be the first such case over alleged wrongdoing by a credit agency tied to the financial crisis.

S&P said the justice department had informed them of the impending civil suit, although the federal agency declined to comment.

The move follows a breakdown in talks between the justice department and S&P, the Wall Street Journal reports.

Several states are expected to join the suit, US media report.

'Key enablers'

S&P and other agencies have faced criticism from investors, politicians and regulators for assigning AAA ratings to thousands of subprime and other mortgage securities that later collapsed.

Such agencies are paid by the issuers of bonds and other securities for ratings, raising concern about potential conflicts of interest.

Grades assigned by these firms can affect a company's ability to raise or borrow money as well as how much investors will pay for their securities.

In its January 2011 report, the US Financial Crisis Inquiry Commission called the agencies "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown".

S&P has previously disclosed a Securities and Exchange Commission (SEC) investigation into its rating of a specific $1.6bn (£1bn) collateralised debt obligation (CDO) known as Delphinus CDO 2007-1.

Delphinus was the basis of a $127m settlement by Mizuho Financial Group over allegations that the US unit of the company obtained false credit ratings for the CDO using millions of dollars in dummy assets.

It is unclear if Delphinus is included in the expected civil suit.

S&P has also faced lawsuits from investors, and argues its ratings constitute opinions protected by the First Amendment to the US Constitution.

The firm says it "deeply regrets" how its CDO ratings failed to anticipate mortgage market conditions as the financial crisis hit, and that it has since spent $400m to help bolster the quality of its ratings.

"Every CDO that [the department] has cited to us also independently received the same rating from another rating agency," S&P said in a statement on Monday.

"The Department of Justice would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith."