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?
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.
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