S&P close to $1.37B deal over risky mortgage bond ratings

AP News
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Posted: Jan 28, 2015 7:10 PM
S&P close to $1.37B deal over risky mortgage bond ratings

WASHINGTON (AP) — Standard & Poor's is close to a $1.37 billion settlement with the Obama administration and U.S. states over allegations it knowingly inflated its ratings of risky mortgage investments that helped trigger the financial crisis.

The credit rating agency is expected to sign an agreement to settle with the Justice Department and about 20 state attorneys general, a person familiar with the matter said Wednesday. The person spoke on condition of anonymity because the settlement isn't finalized and hasn't been announced. It may be completed next week, the person said.

John Piecuch, a spokesman for New York-based S&P, a division of McGraw Hill Financial Inc., said the company declined to comment.

The settlement would resolve civil charges filed nearly two years ago accusing S&P of failing to warn investors that the housing market was collapsing in 2006 because doing so would hurt its ratings business.

According to the lawsuits filed by the Justice Department and nearly two dozen states, S&P gave high ratings to the securities backed by risky mortgages because it wanted to get more business from the big banks that issued them.

The Justice Department suit against S&P was one of the Obama administration's most aggressive actions against those deemed responsible for contributing to the worst financial crisis since the Great Depression, and it followed years of criticism that the U.S. government had failed to do enough to hold financial-market players accountable.

The Justice Department had demanded $5 billion in penalties from S&P when it sued the company in February 2013. A payment of $1.37 billion to settle the case would be less than S&P's revenue in 2013 of $2.27 billion.

The three big rating agencies — S&P, Moody's and Fitch — have been blamed for helping fuel the 2008 crisis by giving high ratings to high-risk mortgage securities. The high ratings made it possible for banks to sell trillions of dollars' worth of those securities — some investors, such as pension funds, can only buy securities that carry high credit ratings.

But those investments soured when the housing market went bust in 2006.

Experts have said the Justice Department lawsuit against S&P could serve as a template for action against Fitch and Moody's.

S&P disputed the government's allegations when the federal suit was filed, calling the legal action "meritless" and the claims "simply not true." The company insisted its ratings were based on a good-faith assessment of the performance of home mortgages during a time of market turmoil. S&P also accused the government of filing the lawsuit against it as "retaliation" for its downgrade of the United States' credit rating in 2011.

The Wall Street Journal, citing unidentified people familiar with the situation, reported earlier Wednesday that the settlement amount would likely be $1.37 billion.

Last week, S&P agreed to pay the federal government, New York state and Massachusetts more than $77 million to settle separate charges by the Securities and Exchange Commission related to its ratings of high-risk mortgage securities after the crisis. The SEC had accused S&P of fraudulent misconduct, saying the company loosened standards to drum up business in 2011 and 2012.

S&P neither admitted nor denied the charges in the settlement.