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| Standard & Poor's expects lawsuit over subprime ratings | |
| (about 1 hour later) | |
| Standard & Poor's says it is to be sued by the US government over the credit agency's rating 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. | 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 credit 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. | |
| 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 AAA ratings to thousands of subprime and other mortgage securities that later collapsed. | |
| 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 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) collateralised debt obligation (CDO) known as Delphinus CDO 2007-1. | |
| Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. 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." |