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US expected to sue Standard & Poor's

Lawsuit would mark first major enforcement action against agencies which gave high marks to risky mortgage debt.
Last Modified: 05 Feb 2013 01:39
Agencies like S&P gave high marks to mortgage debt that later collapsed once the housing bubble burst [Reuters]

The US government is expected to file civil charges against Standard & Poor's over the agency's assessments of the mortgage debt that helped to fuel the 2008 financial crisis.

The charges would mark the first enforcement action the government has taken against a major rating agency.

S&P said Monday that the Justice Department had informed the rating agency that it intends to file a civil lawsuit focusing on S&P's ratings of mortgage debt in 2007.

The action would not involve any criminal allegations, though; critics have long complained about the government's failure to bring criminal charges against any major Wall Street firms involved in the financial crisis. But criminal charges would require a higher burden of proof.

If S&P is eventually found to have committed civil violations, it could face fines and limits on how it does business.

S&P denies any wrongdoing and says any lawsuit would be without merit. The company said in a statement that a federal lawsuit would "disregard" the fact that S&P reviewed the same data on risky mortgages as US government officials, who said publicly in 2007 that the problems in the subprime mortgage market appeared to be limited.

S&P said it "deeply regrets" that some of its ratings "failed to fully anticipate the rapidly deteriorating conditions in the US mortgage market during that tumultuous time."

Nanda Chitre, a spokeswoman for the US justice department, declined to comment on the matter.

A free speech issue?

According to a report in the New York Times, the lawsuit will likely be brought this week after settlement talks between the department and S&P broke down last week.

The talks collapsed over federal authorities' insistence that a settlement involve at least $1bn, the Times reported.

Judges have previously thrown out claims brought by investors against the rating agencies, on the grounds that their ratings amount to free speech protected by the first amendment of the US constitution.

But the ratings in the expected S&P suit were not published widely, as most bond ratings are. As a result, several courts have ruled that those ratings do not enjoy free-speech protection.

S&P, Moody's, and Fitch Ratings are the three major ratings agencies, and they have been blamed for helping fuel the financial crisis by assigning AAA ratings to trillions of dollars in risky securities backed by subprime mortgages.

The securities collapsed once the housing bubble burst and home-loan delinquencies soared. Major US banks absorbed tens of billions in losses.

The rating agencies are important arbiters of the creditworthiness of securities traded around the world. The grades they assign can affect a company's ability to raise or borrow money and how much investors will pay for securities it issues.

Critics have long argued that rating agencies have an inherent conflict of interest, because they are paid by the same companies whose products and credit they rate.

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Source:
Associated Press
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