Standard & Poor’s said it expects to be the target of a U.S. Department of Justice civil lawsuit over its mortgage bond ratings, the first federal enforcement action against a credit rating agency over alleged illegal behavior tied to the recent financial crisis.
Shares of McGraw-Hill Cos, the parent of S&P, plunged 13.8 percent on Monday after news of the expected lawsuit surfaced, their biggest one-day percentage decline since the 1987 stock market crash, according to Reuters data.
An announcement of a lawsuit is expected on Tuesday, a person familiar with the matter said. . . .
S&P said the expected Justice Department lawsuit focuses on its ratings in 2007 of various U.S. collateralized debt obligations.
The agency had previously disclosed a probe by the U.S. Securities and Exchange Commission into its ratings for a $1.6 billion CDO known as Delphinus CDO 2007-1. It was not immediately clear whether that CDO is a focus of the case.
“A DOJ lawsuit would be entirely without factual or legal merit,” S&P said in a statement. “The DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.”
In a variety of lawsuits brought by investors, S&P has maintained that its ratings constitute opinions protected by the free speech clause of the U.S. Constitution.
It’s abundantly clear that the ratings agencies’ assessments of the quality of various credit products in the years leading up to the financial crisis were wildly inaccurate, especially given the products composed of risky mortgage loans which banks traded or sold with a shiny “AAA” stamped on them by Moody’s or S&P, when the underlying securities didn’t deserve it. The DOJ is now suggesting, apparently, that S&P and others should be held criminally responsible for that, in part, perhaps, because the issuers of credit products are the ones who pay the ratings agencies to assess and label them, creating an obvious conflict of interest.