WASHINGTON — The U.S. government is expected to file civil charges against Standard & Poor’s Ratings Services, alleging that it improperly gave high ratings to mortgage debt that later
plunged in value and helped fuel the 2008 financial crisis.
The charges would be the first enforcement action the government has taken against a major rating agency involving the financial crisis.
S&P said Monday that the Justice Department had informed the ratings agency that it intends to file a civil lawsuit focusing on ratings of mortgage debt in 2007.
The action does not involve criminal allegations. Critics have long complained about the lack of criminal charges against any major Wall Street players involved in the crisis. Criminal charges would require a higher burden of proof and carry the threat of jail time.
If S&P is found guilty of civil violations, it could face fines and limits on how it does business.
S&P denies any wrongdoing and says any lawsuit would be without merit.
The company said a federal lawsuit would “disregard” the fact that S&P reviewed the same data on risky mortgages as U.S. government officials, who said publicly in 2007 that the problems in the subprime mortgage market appeared to be limited.
S&P said it “deeply regrets” that its ratings on some securities “failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market.”
Justice Department spokeswoman Nanda Chitre declined to comment.
According to a report in The New York Times, the lawsuit will likely be brought this week. Talks between S&P and the Justice Department broke down last week over authorities’ insistence that a settlement involve at least
$1 billion, the Times reported.
Judges have thrown out claims brought by investors against the rating agencies, on the grounds that their ratings amount to free speech protected by the First Amendment.
That argument hasn’t always succeeded in cases involving investments such as those in the S&P suit, according to research by The Brattle Group, a consulting firm.
That’s because those ratings weren’t published widely, as most bond ratings are. As a result, several courts have ruled that those ratings do not enjoy free-speech protection.
S&P is a unit of New York-based McGraw-Hill Cos., whose stock plunged nearly 14 percent Monday after reports surfaced about the expected lawsuit.
Moody’s Corp., the parent of Moody’s Investors Service, another rating agency, closed down nearly 11 percent.
S&P, Moody’s and Fitch Ratings, the third major rating agency, have been blamed for helping fuel the financial crisis by assigning AAA ratings to trillions of dollars in risky securities backed by subprime mortgages. The securities collapsed once the housing bubble burst and home-loan delinquencies soared. Major banks absorbed tens of billions in losses.
The ratings agencies are important arbiters of the creditworthiness of securities traded around the world. The grades they assign can affect a company’s ability to raise or borrow money and how much investors will pay for securities it issues.
The securities in the anticipated lawsuit are collateralized debt offerings – investment vehicles that contain many underlying mortgage loans. A CDO generally gains in value if borrowers repay, but a wave of defaults can cause them to tumble in value. Soured CDOs contributed to and intensified the financial crisis.
Critics have long argued that rating agencies have an inherent conflict of interest: They are paid by the same companies whose products and credit they rate. The agencies have been accused of issuing unduly high ratings before the crisis, in part because of pressure from banks they desired as clients.