US suing S&P over positive analysis of risky mortgages

The US government is suing Wall Street’s largest credit rating agency for failing to warn about growing problems in the US mortgage market in the lead-up to the worst financial crisis since the Great Depression of the 1930s.

Standard & Poor’s faces the legal action for grading bonds backed by risky mortgages at perfect ratings as far back as 2004, three years before they tipped the country into financial crisis.

In a lawsuit filed late on Monday in a Los Angeles court, the US justice department sued S&P for its positive analysis of soured mortgage securities, which were found to be worthless in 2007, sparking the global financial crisis.

Only agency sued

S&P is the only agency of the three main reviewers of company stocks, bonds and other products trading in the global financial markets singled out in the lawsuit, even though Moody’s and Fitch have also been criticised for assigning low-risk AAA ratings to complex bonds comprising high-risk US residential mortgages.

The federal case against the ratings agency, which is owned by publisher McGraw-Hill, is expected to be joined by more than a dozen state prosecutors as investigators turn their sights on the agencies that approved high-risk bonds.

The justice department’s lawsuit said that from September 2004 to October 2007 the agency “knowingly and with intent to defraud, devised, participated in and executed a scheme to defraud investors”.

Credit ratings

Prosecutors claim S&P falsely represented that its credit ratings were “objective, independent, uninfluenced by any conflicts of interest”.

S&P, which has also been investigated by the US markets watchdog, the Securities and Exchange Commission, is said to have failed to reach a settlement with prosecutors who had sought a penalty of more than $1 billion (€736 million) and an admission of wrongdoing. The agency has said it will “vigorously defend” itself.

While its credit analysts “deeply regret” that the ratings of the 2007 debt securities known as collateralised debt obligations “did not perform as expected, 20/20 hindsight is no basis to take legal action against the good-faith opinions of professionals”, S&P said.

Prosecutors obtained more than 20 million pages of emails by S&P employees as part of their investigation.