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Standard & Poor's expects lawsuit over subprime ratings | Standard & Poor's expects lawsuit over subprime ratings |
(5 months later) | |
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. | 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. | 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 ratings agency tied to the financial crisis. | 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. | 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. | 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. | 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. | 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' | '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. | 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. | 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. | 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. | 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. | 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". | 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. | 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. |
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 | 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. | 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. | 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. | 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. | 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. | "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." | "The Department of Justice would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith." |