WASHINGTON (AP) — The U.S. government says Standard & Poor’s knowingly inflated its ratings on risky mortgage investments that helped trigger the 2008 financial crisis.
The credit rating agency gave high marks to mortgage-backed securities because it wanted to earn more business from the banks that issued the investments, the Justice Department alleges in charges filed in federal court in Los Angeles.
The case is the government’s first major action against one of the credit rating agencies that stamped their approval on Wall Street’s soon-to-implode mortgage bundles. It marks a milestone for the Justice Department, which has long been criticized for failing to act aggressively against the companies that contributed to the crisis.
According to the lawsuit, S&P knew that home prices were falling and that borrowers were having trouble repaying loans. Yet these realities weren’t reflected in the safe ratings S&P gave to complex real-estate investments known as mortgage-backed securities and collateralized debt obligations.
At least one S&P executive who had raised concerns about the company’s proposed methods for rating investments was ignored.
S&P executives expressed concern that lowering the ratings on some investments would anger the clients selling these investments and drive new business to S&P’s rivals, the government claims.
“Put simply, this alleged conduct is egregious — and it goes to the very heart of the recent financial crisis,” Attorney General Eric Holder said at a news conference Tuesday.
Holder called the case “an important step forward in our ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history.”
At the news conference, acting Associate Attorney General Tony West said “we think that at the very least,” S&P is liable for more than $5 billion in civil penalties.
Joining the Justice Department in the announcement were attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa, and Mississippi, who have filed or will file separate, similar civil fraud lawsuits against S&P.
On Tuesday, California’s attorney general filed a lawsuit in San Francisco Superior Court claiming that S&P’s inflated ratings on risky mortgage bonds cost the state’s public pension funds and other investors billions of dollars.
More states are expected to sue, the Justice Department said.
S&P, a unit of New York-based The McGraw-Hill Companies, Inc. (NYSE:MHP), called the federal lawsuit “meritless” in a lengthy statement.
“Hindsight is no basis to take legal action against the good-faith opinions of professionals,” the company said. “Claims that we deliberately kept ratings high when we knew they should be lower are simply not true.”
Rating agencies are widely blamed for contributing to the financial crisis that caused the deepest recession since the Great Depression. They gave high ratings to pools of mortgages and other debt assembled by big banks and hedge funds. Their ratings gave even risk-averse investors the confidence to buy them.
Some investors, including pension funds, can buy only investments that carry high ratings. In effect, rating agencies like S&P greased the assembly line that allowed banks to package and sell risky mortgages that generated huge profits.