Uncle Sam is suing Standard & Poor# Stock
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Standard & Poor's says it is to be sued by the US government over the credit
ratings agency's assessment of mortgage bonds before the financial crisis.
The civil lawsuit would focus on S&P's high ratings in 2007 for some
mortgage-backed securities that later collapsed in value, said the agency.
S&P says the case is entirely without factual or legal merit.
The suit would be the first such case over alleged wrongdoing by a ratings
agency tied to the financial crisis.
S&P said the justice department had informed them of the impending civil
suit, although the federal agency declined to comment.
The move follows a breakdown in talks between the justice department and S&P
, the Wall Street Journal reports.
Continue reading the main story McGraw-Hill Companies Inc.
Last Updated at 04 Feb 2013, 15:57 ET
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Several states are expected to join the suit, US media report.
Shares in S&P's owner, the US publishing and media group McGraw Hill, fell
14% on Wall Street on Monday following the announcement, while those in
fellow ratings agency Moody's fell 10% - indicating the market expects that
they may be next in the justice department's sights.
'Key enablers'
S&P and other agencies have faced criticism from investors, politicians and
regulators for assigning their top AAA ratings to thousands of subprime and
other mortgage securities that later collapsed in value.
Such agencies are paid by the issuers of bonds and other securities for
ratings, raising concern about potential conflicts of interest.
Grades assigned by these firms can affect a company's ability to raise or
borrow money as well as how much investors will pay for their securities.
In the case of the subprime mortgage bubble, ratings agencies including S&P
were hired to assess collateralised debt obligations (CDOs) - complex
financial transactions that packaged together thousands of loans to
individual homebuyers.
The ratings agencies' job was to assess the likelihood that the home loans -
and therefore the CDOs - would ultimately be repaid. Their ratings enabled
the investment banks which put the CDOs together to then sell them to
investors around the world.
In its January 2011 report, the US Financial Crisis Inquiry Commission
called the agencies "essential cogs in the wheel of financial destruction"
and "key enablers of the financial meltdown".
S&P has previously disclosed a Securities and Exchange Commission (SEC)
investigation into its rating of a specific $1.6bn (£1bn) CDO known as
Delphinus CDO 2007-1.
Continue reading the main story Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Collateralised debt obligations (CDOs) AAA-
ratingAdministrationAusterityBailoutBankruptcyBase rateBasel accordsBear
marketBISBondBRICBull marketCapitalCapital adequacy ratioCapitulation (
market)Carry tradeChapter 11Collateralised debt obligations (CDOs)Commercial
paperCommoditiesCore inflationCorrection (market)CPICredit crunchCredit
default swap (CDS)Credit ratingCurrency pegDead cat bounceDebt
restructuringDefaultDeficitDeflationDeleveragingDerivativeDividendsDodd-
FrankDouble-dip recessionECBEFSFEFSMEIBEquityESMEurobondEuropean Banking
AuthorityFederal ReserveFinancial Policy CommitteeFiscal policyFreddie Mac,
Fannie MaeG20G7G8GDPGlass-SteagallHaircutHedge fundHedgingIIFIMFImpairment
chargeIndependent Commission on BankingInflationInsolvencyInvestment
bankJunk bondKeynesian economicsLehman
BrothersLeverageLiabilityLiborLiquidationLiquidityLiquidity crisisLiquidity
trapLoans-to-deposit ratioMark-to-market (MTM)Monetary policyMoney
marketsMonoline insuranceMortgage-backed securities (MBS)MPCNaked short
sellingNationalisationNegative equityOECDOutright Monetary Transactions (
OMTs)Ponzi schemePrivate equity fundProfit warningQuantitative easingRating
agencyRecapitalisationRecessionRepoReserve currencyReservesRetained
earningsRights issueRing-fenceSecurities lendingSecuritisationSecurityShadow
bankingShort sellingSpread (yield)SPVStability pactStagflationSticky
pricesStimulusSub-prime mortgagesTARPTier 1 capitalTobin taxToxic
debtsTroikaUnwindVolcker RuleWorld BankWrite-downYield
Collateralised debt obligations (CDOs)
A financial structure that groups individual loans, bonds or other assets in
a portfolio, which can then be traded. In theory, CDOs attract a stronger
credit rating than individual assets due to the risk being more diversified.
But as the performance of many assets fell during the financial crisis, the
value of many CDOs was also reduced.
Glossary in full Delphinus was the basis of a $127m settlement by Mizuho
Financial Group over allegations that the US unit of the company obtained
false credit ratings for the CDO using millions of dollars in dummy assets.
It is unclear if Delphinus is included in the expected civil suit.
S&P has also faced lawsuits from investors, and argues its ratings
constitute opinions protected by the First Amendment to the US Constitution.
The firm says it "deeply regrets" how its CDO ratings failed to anticipate
mortgage market conditions as the financial crisis hit, and that it has
since spent $400m to help bolster the quality of its ratings.
"Every CDO that [the department] has cited to us also independently received
the same rating from another rating agency," S&P said in a statement on
Monday.
"The Department of Justice would be wrong in contending that S&P ratings
were motivated by commercial considerations and not issued in good faith."
ratings agency's assessment of mortgage bonds before the financial crisis.
The civil lawsuit would focus on S&P's high ratings in 2007 for some
mortgage-backed securities that later collapsed in value, said the agency.
S&P says the case is entirely without factual or legal merit.
The suit would be the first such case over alleged wrongdoing by a ratings
agency tied to the financial crisis.
S&P said the justice department had informed them of the impending civil
suit, although the federal agency declined to comment.
The move follows a breakdown in talks between the justice department and S&P
, the Wall Street Journal reports.
Continue reading the main story McGraw-Hill Companies Inc.
Last Updated at 04 Feb 2013, 15:57 ET
price change %
50.30 -
-8.04 -
-13.78
Several states are expected to join the suit, US media report.
Shares in S&P's owner, the US publishing and media group McGraw Hill, fell
14% on Wall Street on Monday following the announcement, while those in
fellow ratings agency Moody's fell 10% - indicating the market expects that
they may be next in the justice department's sights.
'Key enablers'
S&P and other agencies have faced criticism from investors, politicians and
regulators for assigning their top AAA ratings to thousands of subprime and
other mortgage securities that later collapsed in value.
Such agencies are paid by the issuers of bonds and other securities for
ratings, raising concern about potential conflicts of interest.
Grades assigned by these firms can affect a company's ability to raise or
borrow money as well as how much investors will pay for their securities.
In the case of the subprime mortgage bubble, ratings agencies including S&P
were hired to assess collateralised debt obligations (CDOs) - complex
financial transactions that packaged together thousands of loans to
individual homebuyers.
The ratings agencies' job was to assess the likelihood that the home loans -
and therefore the CDOs - would ultimately be repaid. Their ratings enabled
the investment banks which put the CDOs together to then sell them to
investors around the world.
In its January 2011 report, the US Financial Crisis Inquiry Commission
called the agencies "essential cogs in the wheel of financial destruction"
and "key enablers of the financial meltdown".
S&P has previously disclosed a Securities and Exchange Commission (SEC)
investigation into its rating of a specific $1.6bn (£1bn) CDO known as
Delphinus CDO 2007-1.
Continue reading the main story Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Collateralised debt obligations (CDOs) AAA-
ratingAdministrationAusterityBailoutBankruptcyBase rateBasel accordsBear
marketBISBondBRICBull marketCapitalCapital adequacy ratioCapitulation (
market)Carry tradeChapter 11Collateralised debt obligations (CDOs)Commercial
paperCommoditiesCore inflationCorrection (market)CPICredit crunchCredit
default swap (CDS)Credit ratingCurrency pegDead cat bounceDebt
restructuringDefaultDeficitDeflationDeleveragingDerivativeDividendsDodd-
FrankDouble-dip recessionECBEFSFEFSMEIBEquityESMEurobondEuropean Banking
AuthorityFederal ReserveFinancial Policy CommitteeFiscal policyFreddie Mac,
Fannie MaeG20G7G8GDPGlass-SteagallHaircutHedge fundHedgingIIFIMFImpairment
chargeIndependent Commission on BankingInflationInsolvencyInvestment
bankJunk bondKeynesian economicsLehman
BrothersLeverageLiabilityLiborLiquidationLiquidityLiquidity crisisLiquidity
trapLoans-to-deposit ratioMark-to-market (MTM)Monetary policyMoney
marketsMonoline insuranceMortgage-backed securities (MBS)MPCNaked short
sellingNationalisationNegative equityOECDOutright Monetary Transactions (
OMTs)Ponzi schemePrivate equity fundProfit warningQuantitative easingRating
agencyRecapitalisationRecessionRepoReserve currencyReservesRetained
earningsRights issueRing-fenceSecurities lendingSecuritisationSecurityShadow
bankingShort sellingSpread (yield)SPVStability pactStagflationSticky
pricesStimulusSub-prime mortgagesTARPTier 1 capitalTobin taxToxic
debtsTroikaUnwindVolcker RuleWorld BankWrite-downYield
Collateralised debt obligations (CDOs)
A financial structure that groups individual loans, bonds or other assets in
a portfolio, which can then be traded. In theory, CDOs attract a stronger
credit rating than individual assets due to the risk being more diversified.
But as the performance of many assets fell during the financial crisis, the
value of many CDOs was also reduced.
Glossary in full Delphinus was the basis of a $127m settlement by Mizuho
Financial Group over allegations that the US unit of the company obtained
false credit ratings for the CDO using millions of dollars in dummy assets.
It is unclear if Delphinus is included in the expected civil suit.
S&P has also faced lawsuits from investors, and argues its ratings
constitute opinions protected by the First Amendment to the US Constitution.
The firm says it "deeply regrets" how its CDO ratings failed to anticipate
mortgage market conditions as the financial crisis hit, and that it has
since spent $400m to help bolster the quality of its ratings.
"Every CDO that [the department] has cited to us also independently received
the same rating from another rating agency," S&P said in a statement on
Monday.
"The Department of Justice would be wrong in contending that S&P ratings
were motivated by commercial considerations and not issued in good faith."
