U.S. to Sue S&P For Pre Financial Crisis Ratings

Standard & Poor’s headquarters in the financial district of New York on August 6, 2011. The United States’ credit rating was cut for the first time ever August 5 when Standard and Poor’s lowered it from triple-A to AA+, citing the country’s looming deficit burden and weak policy-making process. (Photo credit should read STAN HONDA/AFP/Getty Images)

WASHINGTON (TheBlaze/AP) — Standard & Poor’s says the government plans to file a civil lawsuit alleging wrongdoing by the agency when it gave high ratings to mortgage debt securities that later plunged in value and fueled the 2008 financial crisis.

S&P said Monday that it has been told by the Justice Department that it intends to file a civil lawsuit focusing on S&P’s ratings on some mortgage debt securities in 2007. A suit would mark the first enforcement action by the federal government against a major rating agency over the issue.

The big rating agency denies any wrongdoing and says any lawsuit would be without factual or legal merit.

A suit would “disregard” the fact that S&P reviewed the same data on risky mortgages as the rest of the market and U.S. government officials, who publicly said in 2007 that the problems in the subprime mortgage market appeared to be limited, the company said.

For example:

In a statement, S&P said it “deeply regrets” that its ratings on the securities “failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time.” However, the company said, it took “extensive” rating actions in 2007, before other rating agencies, on the mortgage-backed securities that were included in a mix of mortgage securities.

The agency also maintains that its opinions/ratings are protected under the First Amendment.

Justice Department spokeswoman Nanda Chitre declined to comment on the matter.

Critics say rating agencies have an inherent conflict of interest: They’re paid by the companies whose products and credit they rate. The agencies have been accused of issuing unduly high ratings before the crisis because of pressure from banks they wanted as clients.

Final Thought – Consider the following (from the Wall Street Journal):

Many details of the looming enforcement action couldn’t be immediately determined, such as why prosecutors are zeroing in on S&P rather than rivals Moody’s Corp. and Fitch Ratings …

All three credit-rating firms have faced intense criticism from lawmakers for giving allegedly overly rosy ratings to thousands of subprime-mortgage bonds before the housing market collapsed.

For what it’s worth, one thing that sets S&P apart from Moody’s and Fitch is the fact that S&P downgraded the U.S.’ credit rating on August 5, 2011. Both Moody’s and Fitch maintain a “AAA” rating for the U.S.

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Featured image courtesy the AP.