Standard and Poor’s (S&P) is in the viewfinder of U.S. authorities. Monday, the rating agency announced that it would be the subject of legal proceedings by the Department of Justice (DoJ), accusing the rating agency of underestimating the risk of certain assets as the real cause of the financial crisis. S&P said it will “vigorously defend itself” against charges it deems “wrong” and “unjustified”.
DoJ did not react immediately, but the Wall Street Journal said earlier, citing sources familiar with the matter, that it could file a complaint this week that would be joined by Prosecutors in several U.S. states.
S&P, a subsidiary of U.S. media group McGraw-Hill, said the complaint of the U.S. authorities is focused “on its ratings in 2007 of some collateralized debt obligations, CDO.” These securities were based on complex financial arrangements and related to mortgages called “subprime”. The high exposure of many banks to such products had been one of the main causes of the global financial crisis that began in 2007-2008, leading to the collapse of banks like Lehman Brothers but also the ruin of many investors.
The major rating agencies (S&P, but also its competitors Moody’s and Fitch) have been heavily criticized for failing to see the crisis coming, and legislators on both sides of the Atlantic have tried to regulating more their activity. But this is the first time that one of them would be dragged directly to court by the U.S. authorities.
This announcement had an immediate result of plummeting the share price of McGraw-Hill. It ended the day down 13.78% to $50.30. In its statement, S&P says that it deeply regrets that its CDO ratings had failed to fully anticipate the rapid deterioration of the U.S. mortgage market during this tumultuous period.
The agency argues, however, that its analysts “worked diligently to cope with an unprecedented environment, rapidly changing and increasingly volatile.” It recalls in particular lowering its ratings on a range of other financial assets linked to mortgages (residential mortgage-backed securities, RMBS) and launched several warnings about the deteriorating housing market. “With 20/20 hindsight, these strong actions proved insufficient — but they demonstrate that the DoJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith,” S&P said.
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