Moody’s and S&P Soar After Settling Mortgage Lawsuit

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Moody’s and S&P Soar After Settling Mortgage Lawsuit
By Moody's Corporation (Moody's Corporation) [Public domain], via Wikimedia Commons

Two leading U.S. rating agencies settled their lawsuits sending their shares significantly higher in morning trading.

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Moody’s Corporation (NYSE:MCO) shares were up 10.5 percent while Mcgraw-Hill Companies Inc (NYSE:MHP) that owns Standard & Poor’s Rating Services rose by 4.5 percent.

Moody’s and S&P Soar After Settling Mortgage Lawsuit

Both the rating firms said they have settled two long-running lawsuits seeking to hold them responsible for misleading investors about the safety of risky debt vehicles that they had rated. The confidential settlement was with 14 plaintiffs led by Abu Dhabi Commercial Bank and King County in Washington State. The law suit was claiming $638 million and was set to go trial on May 13.The plaintiffs had accused the rating agencies of negligent misrepresentation over their activities regarding the Cheyne and Rhinebridge structured investment vehicles (SIVs).

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The two structured investment vehicles had bought billions of dollars’ worth of subprime mortgage derivatives, and subsequently collapsed during the subprime crisis in 2007. Morgan Stanley (NYSE:MS), which marketed both SIVs and helped structure the Rhinebridge SIV, also settled.

Investors, regulators and politicians have been accusing credit rating agencies of inflating the ratings of risky mortgage-backed and structured securities in a bid to win new business. Many felt these activities also fueled demand from investors who believed the ratings were objective. However prices collapsed when the risks materialized, helping trigger the 2008 global financial crisis.

Mcgraw-Hill Companies Inc (NYSE:MHP), the parent company of S&P, said the settlement was made without any admission of liability of wrongdoing.

S&P had claimed no wrongdoing, and that the ratings given are effectively opinions protected by the U.S. constitution, which guarantees the right to free speech.

A guilty verdict in a trial would have been especially problematic for S&P because it is facing a $5 billion fraud suit from the U.S. Department of Justice, which claims that it inflated ratings in order to continue winning fees, while aware of the risk of subprime mortgages.

Some analysts feel that while the rating agencies have not traditionally settled, the settlement is based on balancing legal costs and the risk of a negative outcome with the cost of a settlement. Some also believe with the elimination of Abu Dhabi overhang, litigation risk would be significant reduced. (http://blogs.marketwatch.com/thetell/2013/04/29/in-a-surprise-move-sp-and-moodys-settle-lawsuit/)

In February 2013, S&P announced that it was facing a $5 billion civil suit from the U.S. Department of Justice, leading to the worst decline in parent company Mcgraw-Hill Companies Inc (NYSE:MHP)’s share price since 1987.

Mcgraw-Hill Companies Inc (NYSE:MHP) reports first-quarter earnings on Tuesday while Moody’s Corporation (NYSE:MCO) reports on Friday.

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