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It’s Official: Feds Sue Famed Ratings Agency S&P — the Same One That Downgraded the U.S.

Feb. 5, 2013 9:57am Becket Adams

WASHINGTON (TheBlaze/AP) — The U.S. government is accusing the debt rating agency Standard & Poor’s of fraud for giving high ratings to risky mortgage bonds that helped bring about the financial crisis.

The government filed a civil complaint late Monday against S&P, the first enforcement action the government has taken against a major rating agency related to the financial crisis.

S&P, a unit of New York-based McGraw-Hill Cos., has denied wrongdoing. It says the government also failed to predict the subprime mortgage crisis.

Indeed, you may recall that certain members of Congress repeatedly assured the American people that there was no “housing bubble”:

Nevertheless, the government’s lawsuit paints a picture of a company that misled investors knowingly, more concerned about making money than about accurate ratings. It says S&P delayed updating its ratings models, rushed through the ratings process and was fully aware that the subprime market was flailing even as it gave high marks to investments made of subprime mortgages.

The government’s lawsuit says that “S&P’s desire for increased revenue and market share … led S&P to downplay and disregard the true extent of the credit risks” posed by the investments it was rating.

For example, S&P typically charged $150,000 for rating a subprime mortgage-backed security, and $750,000 for certain types of other securities. If S&P lost the business – for example, if the firm that planned to sell the security decided it could get a better rating from Fitch or Moody’s – then an S&P analyst would have to submit a “lost deal” memo explaining why he or she lost the business.

That created sloppy ratings, the government said.

“Most rating committees took less than 15 minutes to complete,” the government said in its lawsuit, describing the process where an S&P analyst would present a rating for review. “Numerous rating committees were conducted simultaneously in the same conference room.”

According to the lawsuit, S&P was constantly trying to keep the financial firms — its clients — happy.

Here’s a point-by-point breakdown of the fed’s arguments against S&P’s business practices:

A 2007 PowerPoint presentation on its ratings model said that being “business friendly” was a central component, according to the government.
In a 2004 document, executives said they would poll investors as part of the process for choosing a rating.
A 2004 memo said that “concerns with the objectivity, integrity, or validity” of ratings criteria should be communicated in person rather than through email.
Also that year, an analyst complained that S&P had lost a deal because its criteria for a rating was stricter than Moody’s. “We need to address this now in preparation for the future deals,” the analyst wrote.
By 2006, S&P was well aware that the subprime mortgage market was collapsing, the government said, even though S&P didn’t issue a mass downgrade of subprime-backed securities until 2007. One document describing the performance of the subprime loans backing some investments “was so bad that analysts initially thought the data contained typographical errors,” the government lawsuit said.
Another analyst wrote in a 2007 email, referring to ratings for mortgage-backed investments: “The fact is, there was a lot of internal pressure in S&P to downgrade lots of deals earlier on before this thing started blowing up. But the leadership was concerned of p(asterisk)ssing of too many clients and jumping the gun ahead of Fitch and Moody’s.”

The government filed its lawsuit in U.S. District Court in Los Angeles. The government charged S&P under the The Dodd–Frank Wall Street Reform and Consumer Protection Act, a law supposedly aimed at making sure banks invest safely, and said that S&P’s alleged fraud made it possible to sell the investments to banks.

Wait, S&P is being charged under Dodd-Frank? As in former Congressman Barney “There is no housing bubble” Frank?

Feds Formally Move Ahead With Caharg4es Against S&P Ratings Agency

Barney Frank. (Getty Images)

If S&P is eventually found to have committed civil violations, it could face fines and limits on how it does business. The government said in its filing that it’s seeking financial penalties.

The action does not involve any criminal allegations.

Final Thought: Oddly enough, absent from most reports on the feds suing S&P is any mention of the fact that of the top three major credit ratings agencies, S&P was the only one willing to downgrade the U.S.’ credit rating.

Indeed, as noted yesterday by the Wall Street Journal, it is a little curious that the feds have brought charges against S&P and S&P only:

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.

And although we now have a clearer picture of the fed’s case against S&P, it still doesn’t explain why other ratings agencies — wh0 made similar deals — have been spared litigation. Do you suspect the firm’s decision to downgrade the U.S.’ “AAA” credit rating on August 5, 2011, played a role in the charges being brought against them?

Oh, also, it might be worth mentioning that billionaire investor Warren Buffett has a major, major stake in Moody‘s. So take from that what you will.

Follow Becket Adams (@BecketAdaams) on Twitter

Featured image courtesy Getty Images.

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Comments (52)

media-bias-steals-elections
Posted on February 5, 2013 at 4:42pm
It’s not hard to figure out what the Establishment has established, with the creation of the FED, knowing full well that over time, no regulatory process could be managed and brought to bear on a private banking company?

So the answer is draw a gun on the bank (sue them?)?

You people want to talk about gun control all the time, what do you think happens every time a law is created, a fine, or a tax is created? An invisible man draws his gun, points it at you, and then says, I know what your thinking, did I create 50,000 new laws this month, or 60,000?

Well, you know in all this excitement and no one stopping us, I really don’t know, but being that this is the most powerful tax system in the world, able to keep you in litigation at their discretion for decades at a time, and wipe out your future, you’ve got to ask your self a question, do you feel lucky?

Nothing you can do to amend the US Constitution Mr. Rove, Mr. Boehner? Nothing at all? No, we don’t see invisible men, we see former bosses, we see former co workers, we see disappointed children who don’t see us for long periods of time, we see over worked hospital workers over loaded and in such a hurry, we know they are making avoidable errors, and we see the future employers every time we have some free time to try to make our lives better?

When you see Barney Frank, you hear the song “dancing queen”, and avoid buying fudge pops?

Rush Limbaugh’s Cigar Puffing?

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deerjerkydave
Posted on February 5, 2013 at 3:38pm
What did S&P do again? Oh yeah, they formed an opinion. Obama is a big bully.

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changedone
Posted on February 5, 2013 at 3:32pm
This lawsuit in legal parlance is called “The Plantiff is a Disgruntled Employee of the Defendent” suit.

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steveinva
Posted on February 5, 2013 at 1:29pm
You mess with the bull, you get the horns…

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PAPPY72
Posted on February 5, 2013 at 11:58am
This is classic government corruption. S&P does something that the politico’s don’t like, and the politicos turn around and bring the hammer of government down on them. Don’t mess with the power-elites.

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NotAConstituencyGroup
Posted on February 5, 2013 at 11:46am
Doesn’t Article 1 Section 9 of the constitution (“No Bill of Attainder or ex post facto Law shall be passed.”) prevent the government from bringing suite under a law that was passed after the actions were taken?

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Landon410
Posted on February 5, 2013 at 11:34am
weren’t there repubs in congress saying this was going to happen and asking for reform…. weren’t they called racist for not wanting banks to give loans to poor black people?

If I was S&P I would just play that youtube video of the cspan showing it, we knew it was happening, just because dems are stupid does not mean they should be able to sue people

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- barber2
  Posted on February 5, 2013 at 11:50am
  The Democrats continue their War on Capitalism by using the same tactics ! Now they call The Tea Party ” racists” because the Tea Party wants to reign in spending. Will the Republicans cave AGAIN just like the banks did in the housing mess ? Remember it was ACORN, and the Democrats Playing the Discrimination Card which forced banks to give loans ” to poor minorities.” The banks did not stand up to them then and look what happened . And the crafty Democrats ended up BLAMING the banks ! These Democrats goons have played the Discrimination Card to ruin this country in the past and they are still playing that game today.
  
  Report this comment
- naughtycal
  Posted on February 5, 2013 at 11:56am
  It’s wasn’t S and P that required banks make risjky loans and it wasn’t S and P that manipulated the interest with two GSE Industries. That was Bill Clinton and Andrew Coumo. And it wasn’t S and P that rally the democrats on 5 different occassions to stop Bush from passing stronger regulations on the mortgage industries THAT WAS BARNEY FWANK,NANCY PELOSI,AND CHRIS DODD.
  We American should file a class action lawsuit against those responsible.
  
  Report this comment
- changedone
  Posted on February 5, 2013 at 3:41pm
  Yep. In 2005, Senator John McCain and then-chairman of the Federal Reserve Alan Greenspan testified to a congressional committee, led by Barney Frank and Chris Dodd, that the selling of subprime mortgages. Greenspan and McCain agree with President Bush that there needed to be more regulations in place to keep the banks from trading mortgages as stocks, and that Fannie Mae and Freddie Mack, the two largest government lending institutions, were losing solvency. Barney Frank, in particular, said there was no housing bubble, and that Fannie and Freddie were fine, and the vote for more government regulations on the banks was struck down. How wrong they were!
  
  Report this comment
dnewton
Posted on February 5, 2013 at 11:27am
My state requires local governments to hold idle cash in US Bonds or in AAA securities. The State Comptrollers office was warning counties for holding Fanny Mae and Freddie Mac securities on a technicality citing that they were not really Government backed in the sense that US Treasury Bonds were backed by the Federal Government. Many Counties with Fanny Mae and Freddie Mac Securities refused to comply citing state law still permitted the use of those securities because they were rated AAA by the credit rating agencies. After the stocks lost a lot of their value, the problem started to solve itself but only after the taxpayers took a haircut.

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dnewton
Posted on February 5, 2013 at 11:09am
The government should also take action against accounting firms that predict exaggerated economic development with the next acquisition of a convention center, casino, stadium, high speed rail, some toll roads and industrial park. You can buy the happy talk for pennies but you never see the cornucopia that they promise. The taxpayer is left holding the bag after the goofy politicians rely on their advice. The whole concept of economic impact is misleading and is abused every day.

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Tigress1
Posted on February 5, 2013 at 11:06am
Blame, blame, blame. The gov. wants to blame everybody but themselves. Where were the regulators? THEY were the ones who slacked off on the job! We need regulators to regulate the regulators! Bureaucrat heaven!

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battles
Posted on February 5, 2013 at 11:04am
The government didn’t fail to predict the subprime mortgage crisis, they ignored the subprime mortgage crisis. Brooksley Born, the head of the CFTC at the time, warned of the potential for economic meltdown in the late 1990s.

The Woman Who Warned About the Financial Meltdown Ahead

http://www.seniorwomen.com/news/index.php/the-woman-who-warned-about-the-financial-meltdown-ahead

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hauschild
Posted on February 5, 2013 at 10:59am
Furthermore, must we continue to see repulsive images of Congress’ most infamous pillow-biter???

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hauschild
Posted on February 5, 2013 at 10:57am
Typical leftists; if they don’t “think” something is right, it HAS to be wrong – regardless of evidence, facts, reason or rationale. It’s a completely deluded existence these people enjoy.

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KidCharlemagne
Posted on February 5, 2013 at 10:47am
“The government filed a civil complaint late Monday against S&P”
=================================

“Civil complaint” means that (even if successful), nobody is going to jail for fraud.

“Civil complaint” means that (even if successful) at best a fine will be levied (cost of doing business) and that will be the end of it.

The only reason this sort of action is ever taken is for publicity purposes and the fact that they have already announced beforehand that there is no possibility of anyone being jailed for fraud only confirms this.

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- Cavallo
  Posted on February 5, 2013 at 11:07am
  Fraud is hard to prove. You have to show that they knew ahead of time that this was all going to crash. This isn’t about the collapse of the mortgage markets though, this is about the downgrade. It’s a sucker punch to the gut to take money from them for DARING to speak negatively about the government. The government ponzi scheme is far worse than anything wall street has the ability to contrive, and they want to make sure that S&P shuts up about it.
  
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- barber2
  Posted on February 5, 2013 at 11:45am
  CAV: Yes. The Chicago, ironically the home of Al Capone , radical thugs do not want any info to get out about their involvement. Intimidation by the DOJ, their Media Character Assassination Squad, and the IRS are all handy tools of the Obama Executive Branch. Big Brother is very busy. Guns for now. Conservative media probably next.
  
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- KidCharlemagne
  Posted on February 5, 2013 at 11:46am
  Cavallo
  Posted on February 5, 2013 at 11:07am
  
  Fraud is hard to prove. You have to show that they knew ahead of time that this was all going to crash.
  ===========================
  
  It’s not that hard:
  
  —————————-
  As Harvard law professor Larry Lessig put it two weeks ago when expressing anger over the DOJ’s persecution of Aaron Swartz: “we live in a world where the architects of the financial crisis regularly dine at the White House.” (Indeed, as “The Untouchables” put it: while no senior Wall Street executives have been prosecuted, “many small mortgage brokers, loan appraisers and even home buyers” have been).
  
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dublinthewagons
Posted on February 5, 2013 at 10:32am
Drones over S&P.
Who would want to loan money to this government?
Who would loan money to obummer? Never in my lifetime.

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- Cavallo
  Posted on February 5, 2013 at 10:44am
  You don’t have a choice, Capiche? See.. yoos gunna lend money toos us, at da rate we says, understand?
  
  (at least the mob doesn’t try to feed you a line of BS that it is for the betterment of society)
  
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- GhostOfJefferson
  Posted on February 5, 2013 at 10:59am
  This move is non-shocking in the same way that they found bogus charges to dig up against the movie maker that they were trying to frame for the terrorist attacks in Benghazi.
  
  You wanted a third world banana republic folks, and now here it is. This is how things work in central and south America. Bienvenidos, amigos!
  
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- KidCharlemagne
  Posted on February 5, 2013 at 11:09am
  They don’t loan money to the U.S. government because they WANT to…..
  
  They loan money to the U.S. government because they HAVE to (at least they do if they don’t want to go back and live in the horse & buggy days).
  
  Report this comment
Anonymous T. Irrelevant
Posted on February 5, 2013 at 10:30am
So, now we can add S&P to Obama’s blame list, instead of the R & R Act that was the REAL cause of the mortgage crisis. They were warned, they just didn’t want to listen.

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Cavallo
Posted on February 5, 2013 at 10:27am
r r r r r REVENGE FOR WANDA!

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foosgoddess
Posted on February 5, 2013 at 10:15am
My guess is S&P donated heavily to the Romney campaign. Just a hunch. The regime is as slimy as it gets.

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- Link8on
  Posted on February 5, 2013 at 11:04pm
  This sounds like a set up for Soros to sweep in like a white knight to buy out McGraw Hill publishing (Businessweek) for a lot less than Monday’s price.
  
  This allows the uber liberal media to control another financial news outlet.
  
  Report this comment
Gonzo
Posted on February 5, 2013 at 10:15am
Dear Leader spends more time and effort punishing his administration’s enemies than he does punishing our nation’s enemies.

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- RJJinGadsden
  Posted on February 5, 2013 at 10:20am
  GONZO, Wasn’t Al Sharpton just talking about the NRA having an enemies list? 0bama makes Nixon look like a mere amateur.
  
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- Gonzo
  Posted on February 5, 2013 at 10:22am
  R.J., “Obama makes Nixon look like a mere amateur”
  That was my original thought exactly.
  
  Report this comment
- barber2
  Posted on February 5, 2013 at 10:27am
  The Holder DOJ has focused on destroying American Capitalism which the Chicago radicals think is their greatest enemy. Ask Bill Ayers !
  
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- huey6367
  Posted on February 5, 2013 at 10:46am
  @RJ and @ Gonzo
  
  Nixon was just trying the get re-elected by spying on his enemies. Obama wants us to be a third world nation.
  
  Report this comment
- RJJinGadsden
  Posted on February 5, 2013 at 11:28am
  HUEY6367, I voted for Nixon and am well aware of that. Simply the fact that it was eventually discovered that Nixon actually had such a list then, it would be as I said above amateurish when compared to 0bama’s actions. 0bama actually goes after his declared enemies with no effort spared to destroy them. Followed by the sycophant media day after day. Its thoroughly sickening.
  
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- barber2
  Posted on February 5, 2013 at 11:40am
  RJJ: Agree with your read on the media. The MSM is totally biased and the drones of the radical Left Obama Administration to destroy American capitalism – all hiding behind ” freedom of the press” as they both seek to ” change ” ( wink, wink ) America.
  
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- huey6367
  Posted on February 5, 2013 at 11:52am
  @RJ
  
  I completely agree with you. I was only 6 or 7 when Tricky Dick left office so I was not aware of the Watergate dealings. Obie is without doubt the most corrupt politician this country has ever seen. I believe all politicians are corrupt to some degree but he doesn’t even try to hide it and then goes in front of the cameras and lies his a** off to the entire country. The purpose of my post was to inform those that are not aware of the difference between Nixon and Obie. They are quite different as you know.
  
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- RJJinGadsden
  Posted on February 5, 2013 at 1:12pm
  HUEY6367, I also definitely agree with you as well. I was only trying to clarify my earlier statement. You and I are on the same track.
  
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SamIamTwo
Posted on February 5, 2013 at 10:14am
Good maybe we can get frank and dodd to testify…it will haunt them to the grave. Might as well call up Bill Clinton while they are at it…they all knew what would happen when they walked the wide path to destruction.

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- barber2
  Posted on February 5, 2013 at 10:26am
  Yes. Hope these sleazy Democrats have opened a Pandora’s Box with this latest Obama DOJ intimidation ploy. The Chicago radicals’ War on Capitalism continues unabated…
  
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huey6367
Posted on February 5, 2013 at 10:12am
I wanna see the deposition and court transcripts after this legal battle is over. There should be some garbage in those.

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woodyee
Posted on February 5, 2013 at 10:08am
“Do you suspect the firm’s decision to downgrade the U.S.’ “AAA” credit rating on August 5, 2011, played a role in the charges being brought against them?”

It is so obvious, I recall Mr. [Rush] Limbaugh saying this would happen, not long after S&P’s move! And it is good to point out, as Beckett Adams did, that it is apparent that S&P is being singled out; the irony lies in the fact that the law being used against S&P was written/sponsored by a Congressman who should be in JAIL over the mortgage debacle – Bawney Fwank!

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- RJJinGadsden
  Posted on February 5, 2013 at 10:18am
  WOODYEE, You are right that Rush predicted this. I expect to here this subject pointed out on today’s show and looking forward to it.
  
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- barber2
  Posted on February 5, 2013 at 10:23am
  Yes. And don’t forget Chris Dowd, the Senator from CountryWide , who should share his cell ! Ugh.
  
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- The_Engineer
  Posted on February 5, 2013 at 10:57am
  Perhaps S&P wants to yet again take the lead and inform We The People of another US downgrade….
  
  Seems they are the only ones on the ball and thus, the epicenter of the Fogen’s wrath……
  
  Report this comment
barber2
Posted on February 5, 2013 at 10:06am
The Democrats are so involved in this entire housing fiasco. From the days of the Clinton administration to this current Obama intimidation , they have managed to pull off this assault on the American economy by playing the Discrimination Card . If the Democrats did not control the MSM they would never be able to get away with this.

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- gyro
  Posted on February 5, 2013 at 10:10am
  good explination
  
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progressiveslayer
Posted on February 5, 2013 at 10:05am
We used to live in a constitutional republic now we live in a banana republic and it’s official with this latest act of tyranny. The government caused the housing meltdown with their mafia style tactics used against the banks to force them to make bad loans and the inevitable happens,massive foreclosures.
The rating agency lowers our rating because of the failed policies of government then the government sues the rating agency,only in Amerika.

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caleejr
Posted on February 5, 2013 at 10:03am
I hope S&P brings out truths and facts that will bury corrupt politicians under so much legal crap – they’ll never be in gov’t again; quite frankly – I hope they never see anything but the inside of a concrete cell for a long long time.

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