WASHINGTON D.C. – Standard & Poor’s Financial Services LLC agreed to a $1.3 billion settlement for defrauding investors which lead to a national financial crisis, the U.S. Justice Department announced Tuesday.
The settlement agreement with the ratings company also involved 19 states and Washington D.C.
Federal prosecutors said the ratings company used financial products known as Residential Mortgage-Backed Securities and Collateralized Debt Obligations to bamboozle investors.
The settlement resolves the Department of Justice’s 2013 lawsuit against S&P and its parent corporation McGraw Hill Financial Inc. In addition, it resolves the lawsuits filed by 19 states and Washington D.C.
Each of the 21 lawsuits allege that investors incurred substantial losses on Mortgage-Backed Securities and Debt Obligations for which S&P issued inflated ratings that misrepresented the securities’ true credit risks.
Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.
The settlement is comprised for several elements, say authorities:
- In addition to the payment of $1.3 billion, S&P has acknowledged conduct associated with its ratings of Mortgage-Backed Securities and Debt Obligations during 2004 to 2007.
- S&P formally retracts an allegation that the U.S. lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States.
- Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws.
“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,” said Attorney Eric General Holder.
Adding, “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business. While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”
Half of the $1.3 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency.
The remaining $687.5 million will be divided among the 19 states and the District of Columbia.
In its agreed statement of facts, S&P admits that its decisions on its rating models were affected by business concerns, and that, with an eye to business concerns, S&P maintained and continued to issue positive ratings on securities despite a growing awareness of quality problems with those securities.
S&P acknowledgements include:
S&P promised investors at all relevant times that its ratings must be independent and objective and must not be affected by any existing or potential business relationship.
Relevant people within S&P knew in 2007 many loans in Mortgage-Back Securities transactions S&P were rating were delinquent and that losses were probable.
S&P representatives continued to issue and confirm positive ratings without adjustments to reflect the negative rating actions that it expected would come.
“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Acting U.S. Attorney Stephanie Yonekura.
Adding, “Driven by a desire to increase profits and market share, S&P blessed innumerable securitizations that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off. This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone. This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”