The U.S. Department of Justice filed suit Feb. 4 against McGraw-Hill and its Standard & Poor's unit alleging that the ratings firm knowingly understated credit risks for bonds and derivatives, National Mortgage News reported. This is the first federal case against a ratings firm for grades related to the credit crisis.
The suit alleged that S&P, which issued credit ratings on more than $2.8 trillion of residential mortgage-backed securities and $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, downplayed the risks on portions of those securities in order to get more business from the issuing banks.
“It's going to be a tricky time for rating agencies,” Fred Ponzo, a capital markets analyst at Greyspark Partners, told National Mortgage News. “S&P is probably just the first to face the music.”
The Justice Department’s suit alleged that S&P falsely represented to investors that its credit ratings were objective, independent and uninfluenced by any conflicts of interests. Instead, the suit alleged that the firm bent rating models to suit its business needs.
“S&P's desire for increased revenue and market share in the RMBS and CDO ratings markets led S&P to downplay and disregard the true extent of the credit risks,” the Justice Department stated in its suit, National Mortgage News reported.
The Justice Department is seeking civil penalties of around $1.1 million for each violation.
In a statement issued Feb. 4, S&P said that “A DOJ lawsuit would be entirely without factual or legal merit,” National Mortgage News reported. “It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market, including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.” The firm said it would fight the suit and cited court rulings that have dismissed challenges to the opinions of ratings firms.