Standard & Poor's hit by largest penalty ever levied on credit rating agency

 

Standard & Poor’s, the world’s largest debt-rating agency, has agreed to pay a record penalty in order to settle a lawsuit brought by several state attorney generals over its role in the 2008 financial crisis. The $1.4bn (£925m) settlement is enough to wipe out profits at parent company McGraw Hill Financial for all of 2014.

The case was brought against S&P two years ago by the US Department of Justice and a group of attorney generals, each state’s top lawyer. The original suit demanded more than $5bn in damages.

The payment will be split, with $687.5m going to the DoJ and approximately the same amount going to the 19 states plus the District of Columbia that had also sued. Separately, S&P will also pay an additional $125m to the California Public Employees Retirement System to settle its claim related to the mortgage crisis.

S&P was accused of manipulating its internal procedures in order to create better ratings for packages of sub-prime mortgage securities. A higher rating from a supposedly objective rating agency made the securities appear to be lower risk than they actually were.

Instant messages and emails subpoenaed by the DoJ appeared to back their case, but S&P fought hard before agreeing to yesterday’s settlement.

By settling without admitting any actual wrongdoing, the company is unlikely to face any private claims which could have run into many more billions of dollars. However, the settlement is the largest ever paid by a rating agency and comes on top of $77m it agreed to pay the Securities and Exchange Commission, New York and Massachusetts last month over similar charges. In all, S&P will pay $1.57bn in settlements.

With the case against S&P now settled, the DoJ is understood to have turned its attention to Moody’s, the second largest rating agency. Many of the ratings assigned to sub-prime mortgage securities by S&P were similar to ratings Moody’s gave the same securities. As the mortgage market unravelled, those securities were found to be far riskier than investors were led to believe.

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