Tuesday, 5 February 2013

US accuses S&P of $5bn fraud - Financial Times

Standard & Poor's has been accused by the US justice department of defrauding investors in mortgage-related securities out of at least $5bn by issuing inflated ratings to win hundreds of millions of dollars in fees.

Shares in McGraw-Hill, the credit rating agency's parent, also named as a defendant, have fallen 22.1 per cent since the lawsuit was first revealed on Monday. The 128-page civil lawsuit is the first against a credit-rating agency.

"Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis," said Eric Holder, US attorney-general, in announcing the charges.

DoJ also alleges S&P falsely represented to investors, including Western Federal Corporate Credit Union, Citibank and Bank of America, that its ratings were objective when instead they were influenced by a desire to win fees and market share.

Mr Holder was joined by attorneys-general from Connecticut, California, Delaware, Mississippi, Illinois, Iowa and the District of Columbia. So far, 16 states and the District of Columbia have filed lawsuits against S&P. California said it filed a suit on behalf of Calpers, the largest US public pension fund.

The lawsuit claims that from 2004 until 2007 S&P had "adjusted and delayed" updates to its rating criteria and models. It ignored warnings from its own analysts about the weakening housing market to churn out triple A ratings – the highest – on mortgage-related securities, including collateralised debt obligations.

"S&P's desire for increased revenue and market share . . . and its resulting desire to maintain and enhance its relationships with issuers that drove its ratings business, improperly influenced S&P to downplay and disregard the true extent of the credit risks," the lawsuit alleges.

As the housing market weakened in early 2007, the DoJ alleges, S&P helped banks package securities into CDOs in order to remove them from their balance sheets and sell them to unsuspecting investors.

Tony West, a top DoJ official, said: "We have evidence that S&P not only knew this is what the banks were doing; S&P helped them to do it." Mr West declined to comment on whether they were investigating the banks. The CDOs were soon downgraded and resulted in more than $5bn in losses.

The lawsuit alleges that some S&P analysts joked about the collapsing housing market in early 2007 and circulated rewritten lyrics to the Talking Heads' song "Burning Down the House" as "Bringing Down the House".

S&P rebuffed the allegations, saying: "Claims that we deliberately kept ratings high when we knew they should be lower are simply not true." When the full facts are revealed in court, it will be clear the emails and anecdotes being cited do not prove any wrongdoing," S&P said

The lawsuit comes nearly five years after the Securities and Exchange Commission issued a July 2008 report and two years after the Financial Crisis Inquiry Commission and a Senate investigative committee issued reports criticising S&P, Moody's and Fitch Ratings.

Maxine Waters, ranking member of the House Financial Services Committee, commended the lawsuit, adding, "given the power and influence credit rating agencies have on the market and investor confidence, they should be held to a higher standard of accountability".

Additional reporting by Arash Massoudi

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