Standard & Poor’s Settles Inflated Ratings Case for $1.5 Billion

Credit rating agency Standard & Poor’s will pay $1.5 billion to settle a number of lawsuits accusing the company of inflating the ratings of mortgage securities in the lead up to the 2008 economic crisis. As part of the deal, S & P’s parent company McGraw Hill will pay $687.5 million to the U.S. Justice Department and $687.5 million to the District Columbia and 19 states over their inflated ratings cases.

The U.S. sued the credit rater in 2013, asking for $5 billion and claiming that S & P had bilked investors. The company fought the claims, arguing that the First Amendment protected its ratings and contending that the mortgage ratings case was the government’s way of retaliating after S & P downgraded the United States’ own credit rating. As part of the settlement, the credit rating agency said it found no evidence that retaliation was a factor.

S & P is not admitting to violating any law. It noted that its mission is to give the marketplace information that is independent and objective and employees are not allowed to influence analyst opinions because of commercial relationships.

The credit rating agency did, however, admit that certain relevant individuals within the company knew as far back as 2007 that a lot of loans in residential mortgage-backed securities transactions were delinquent and would likely to lead to losses. Still, S & P representatives kept putting out positive ratings without making adjustments to reflect the expected negative outcomes.

In 2008 a congressional report said that both S & P and credit rating agency Moody’s Corp (MCO.N) had put out ratings that made the high-risk mortgage backed securities appear safer than what was actual. These MBS’s ended up playing a big part in the financial collapse. The report blamed the firms for activating the worst economic crisis in decades when they ended up having to downgrade the ratings that were inflated.

In 2014, The U.S. Securities and Exchange Commission put into place new rules for the ratings industry. However, ratings agencies are still allowed to receive payments by banks giving ratings to securities, which are put out by these financial firms. This issuer-payer model was seen as an incentive for why credit raters artificially inflated the ratings on mortgage backed securities several years ago.

Also, in a separate deal, the credit rater reached a $125 million settlement with the California Public Employee’s Retirement System. The public pension fund said that S & P’s inaccurate ratings caused hundreds of millions of dollars in losses. Calpers also named Moody’s and Fitch Ratings in its lawsuit. Fitch has already settled, while the claims against Moody’s are still pending.

In January, S & P settled another mortgage ratings case with the U.S. Securities and Exchange Commission and New York and Massachusetts state attorneys general for $80 million that resolved allegations accusing the company of misleading the public about the way it rated a number of commercial mortgage investments.

Justice Department and State Partners Secure $1.375 Billion Settlement with S&P for Defrauding Investors in the Lead Up to the Financial Crisis, US Department of Justice, February 3, 2015

S.&.P. Announces $1.37 Billion Settlement With Prosecutors, NY Times, Feb 3, 2015

S&P, Calpers settle suit over mortgage deals for $125 mln, WSJ/Reuters, February 2, 2015

More Blog Posts:
SEC Subjects Credit Rating Agencies, Asset-Backed Securities Issuers to Tighter Rules, Stockbroker Fraud Blog, August 28, 2014

DOJ Gets Ready to Wrap Mortgage Bond Case Against Standard & Poor’s, Probes Moody’s, Institutional Investor Securities Blog, January 31, 2015

Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down, Institutional Investor Securities Blog, December 16, 2014