Financial Services

S&P ends costly battle with $1.5bn settlement

Rating agency will pay more than a year’s profit to settle suits that it inflated ratings on subprime-mortgage bonds at the centre of the 2008 financial crisis

US rating firm Standard & Poor’s said February 3, 2015 it had agreed to pay $1.37 billion to settle lawsuits that it overrated mortgage bonds at the heart of the “subprime” housing crisis. S&P said it had not admitted to any legal violations in the settlements, which resolve 2013 lawsuits filed by the US Department of Justice, 19 states and the District of Columbia. Under a separate settlement with California pension fund CalPERS over mortgage deals, the company will pay $125 million. S&P said it would pay $687.5 million to the Justice Department and $687.5 million to the states and Washington, DC. (Photograph: Emmanuel DunandEMMANUEL DUNAND/AFP/Getty Images)

Tue Feb 3 2015 - 14:49

Standard and Poor’s $1.5 billion settlement with the US Justice Department, more than a dozen states and the biggest US pension fund today will let the world’s biggest rating company move beyond a bruising legal battle, at a steep cost.

SandP, a unit of McGraw Hill Financial, will pay more than a year’s profit to settle suits that it inflated ratings on subprime-mortgage bonds at the centre of the 2008 financial crisis. SandP sealed the deal without admitting wrongdoing.

Ending the costly legal battle will help the company close a profit gap with its biggest competitor, Moody’s Corp. The $1.375 billion settlement to be split evenly with the Justice Department and 19 states and the District of Columbia caps a rancorous two-year court battle during which SandP accused the Justice Department of cracking down unfairly on the company after its 2011 decision to downgrade US sovereign debt to AA+ from AAA.

SandP was the only credit rater sued by the Justice Department, even though its competitors also issued top ratings for similar subprime-backed securities. The Justice Department has denied there was any connection between the downgrade and the lawsuit.

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SandP reached a separate $125 million settlement with the California Public Employees Retirement System, or Calpers, to resolve claims over three structured investment vehicles.

Financial sting

The company and regulators "settled this matter 'to avoid the delay, uncertainty, inconvenience, and expense of further litigation,'' Catherine Mathis, an SandP spokeswoman, said in a release.

The settlement arguably delivers a greater financial sting to McGraw Hill than did last year’s deals with the banks that admitted they misled investors about the quality of securities assembled from subprime loans. SandP’s cash payout is equivalent to about a year and a half of profit for McGraw Hill.

By comparison, the majority of the Justice Department's $16.7 billion settlement with Bank of America represented a pledge that the bank would write down or forgive mortgage- holders debt; the bank's cash payout was $9.7 billion, or about 85 per cent of its year-earlier profit. Also in 2014, Citigroup's $7 billion settlement with the Justice Department required it to pay out $3.8 billion in cash -- roughly the equivalent of its second-quarter profit that year.

Bloomberg

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