Standard & Poor’s (S&P), the world’s leading credit rating agency, is to pay US$1.5 billion to settle US allegations that it inflated ratings linked to the financial crisis that unleashed the so-called “Great Recession.”
The settlement agreements announced on Tuesday resolve civil lawsuits filed by the US Department of Justice, 19 states, the US capital and the nation’s largest pension fund.
S&P, a unit of McGraw Hill Financial Inc, has agreed to pay US$1.375 billion to resolve lawsuits accusing it of bilking investors by hiding the true risks of mortgage bonds linked to the financial crisis, the justice department said.
Half of the sum is to go to the department and the other half to the 19 states and Washington.
Separately, the ratings agency is to pay US$125 million to California state pension fund CalPERS to settle allegations of fraud that led to the pension’s investment losses.
The department and the states sued S&P two years ago, saying it gave undeservedly rosy ratings to bonds that were backed by subprime mortgages, risky home loans that defaulted in droves as the housing price bubble collapsed.
The subprime crisis was at the center of the US financial meltdown that led to the recession that began in 2008.
According to the justice department suit, S&P’s alleged fraud occurred from at least 2004 until 2007 and ultimately caused investors, including many financial institutions backed by the US federal government, to lose billions of US dollars.
S&P had claimed that its ratings were independent and not affected by its relationship with the companies hiring it to rate their securities.
However, in a statement of facts as part of the settlement, S&P admitted that company executives had complained internally that it was not downgrading already soured bonds because it was worried about losing some ratings business.
“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,” US Attorney General Eric Holder said. “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.”
S&P acknowledged its fraudulent conduct with the ratings of the structured financial products, but it said it had not admitted to any legal violations.
“The settlement agreement states that all parties, including the company, the [Department of Justice] and the states, settled this matter ‘to avoid the delay, uncertainty, inconvenience, and expense of further litigation,’” the company said.
It said that agreeing to the payments was “in the best interests of the company and its shareholders.”
Moody’s Investors Service, another top ratings agency, is also under investigation for allegedly overvaluing bonds in the ongoing justice department probe of crisis-era failings, the Wall Street Journal has reported.
Justice authorities and Moody’s executives have been holding talks in recent months on the matter, the newspaper said.
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