S&P Close To $1 Billion MBS Ratings Settlement

By Mani
Updated on

Standard & Poor’s is said to be negotiating with the Justice Department to settle the inflated credit ratings to mortgage investments that spurred the financial crisis.

S&P is the only credit rater sued by the Justice Department’s RMBS working group.

DOJ sued S&P

As reported by ValueWalk, Standard and Poor’s Ratings Services said it faced a civil suit from the Department of Justice over accusations of mortgage investment rating inflation. The Department of Justice claimed the S&P set the mortgage market up for a crash.

DOJ Sues S&P For Allegedly Inflating Mortgage Investment Ratings

However, last October, S&P, a division of McGraw Hill Financial Inc. indicated that they were in “active discussions” with federal and state regulators to settle charges regarding ongoing investigations.

Standard & Poors Prepares For DoJ Fine on Low Side

Citing a person familiar with the mater, Bloomberg reports that the rating agency is close to a settlement of about $1 billion with the U.S. for allegedly misleading investors about its ratings of MBS before the subprime crisis. The case could be settled as early as this quarter, according to the report.

So far, the DOJ has secured settlements worth tens of billions of dollars during the past two years from mortgage lenders and banks it blamed for the 2008 financial crisis. Those companies were blamed for generating unprecedented amounts of shoddy mortgages that were packaged and sold to investors as securities, many of which turned out to be worthless despite their investment-grade ratings.

The U.S. accused the New York-based S&P of lying about its ratings’ being free of conflicts of interest. The government indicated it might seek as much as $5 billion in civil penalties for losses by federally insured financial institutions that relied on the credit rater’s investment-grade ratings for MBS and collateralized-debt obligations.

S&P alleged that it was singled out among the credit rater because of its downgrade of U.S. debt in 2011, while its competitors, which issued the same grades for the same securities, weren’t sued by the U.S.

S&P Said Near $1 Billion Mortgage Ratings Settlement With U.S.

Over a dozen state attorneys general and the Justice Department are demanding that S&P pay over $1 billion to settle the case. Interestingly, the government offered S&P roughly the same settlement size, $1 billion plus, before filing suit two years ago. Ben Protess of Dealbook points out that had S&P embraced that offer, instead of fighting accusations that it abused its role as a rating agency, it could have walked away without accumulating tens of millions of dollars in legal fees.

S&P Nears Settlement With Justice Dept. Over Inflated Ratings

Recently most Wall Street firms, when faced with the threat of a DOJ lawsuit, they prefer to cut a check rather than go to court. This can be evidenced from JP Morgan agreeing to pay $13 billion to settle a crisis and Bank of America over $16 billion.

Bank of America Stock Rises After DoJ Punishment

In 2013, Moody’s Corporation and S&P settled two long-running lawsuits seeking to hold them responsible for misleading investors about the safety of risky debt vehicle that they had rated. The confidential settlement was with 14 plaintiffs led by Abu Dhabi Commercial Bank and King County in Washington State.

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