S&P paying $1.4B over crisis-era ratings

Paul Davidson, Kaja Whitehouse and Kevin Johnson, USA TODAY 10:45 a.m. EST February 3, 2015


(Photo: Henry Ray Abrams, AP)

Standard & Poor's Financial Services said Monday it has agreed to pay $1.38 billion to settle government charges that it inflated ratings of mortgage-backed securities and other assets during the housing boom, helping set off the financial crisis and recession.

Under the deal, the unit of McGraw Hill Financial will pay $687.5 million to the Justice Department, and an equal amount to 19 states and the District of Columbia. It's the largest penalty ever recovered from a credit rating agency.

From 2004 to 2007, the government alleged, S&P falsely claimed its ratings of mortgage securities and collateralized debt obligations – a type of derivative -- were objective and independent. Instead, the government says, they were based on its desire to increase revenue and favor banks' interests.

At a news conference Tuesday, Attorney. General Eric Holder said, "On more than one occasion, the company's leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised." Holder said the strategy "did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression."

The settlement, which is subject to court approval, includes no findings that the company violated the law. The settlement agreement states that all parties, including the Company, the DOJ and the States, settled this matter "to avoid the delay, uncertainty, inconvenience, and expense of further litigation."

"After careful consideration, the company determines that entering into the settlement agreement is in the best interests of the company and its shareholders and is pleased to resolve these matters," the company said in a statement.

S&P said it reached a separate settlement to pay $125 million to the California Public Employees Retirement System to resolve its claims related to ratings of three structured investment vehicles. That deal is not subject to court approval.

The credit rating agency's agreement represents one of the government's key efforts to hold accountable market players deemed responsible for contributing to the worst financial crisis since the Great Depression. The settlement announced Tuesday came after months of negotiations.

The Justice Department filed civil fraud charges against S&P two years ago this week. It accused the company of failing to warn investors that the housing market was collapsing in 2006 because doing so would hurt its ratings business.

The Justice Department had demanded $5 billion in penalties from S&P when it sued the company in February 2013. The payment of about $1.38 billion to settle the case is less than S&P's revenue in 2013 of $2.27 billion.

The three big rating agencies — S&P, Moody's Investors Service and Fitch Ratings — have been blamed for helping fuel the 2008 crisis by giving high ratings to high-risk mortgage securities. The high ratings made it possible for banks to sell trillions of dollars' worth of those securities. Some investors, such as pension funds, can only buy securities that carry high credit ratings.

Those investments soured when the housing market went bust in 2006.

Experts say the Justice Department's lawsuit against S&P could serve as a template for action against Fitch and Moody's.

S&P disputed the government's allegations when the federal suit was filed, calling the legal action "meritless" and the claims "simply not true." The company insisted its ratings were based on a good-faith assessment of the performance of home mortgages during a time of market turmoil.

Last month, S&P agreed to pay the federal government, New York state and Massachusetts more than $77 million to settle separate charges by the Securities and Exchange Commission related to its ratings of high-risk mortgage securities after the crisis. The SEC had accused S&P of fraudulent misconduct, saying the company loosened standards to drum up business in 2011 and 2012.

S&P neither admitted nor denied the charges in the settlement.

http://www.usatoday.com/story/money/...-fcc/22788653/