The U.S. government is accusing the debt rating agency Standard & Poor’s of fraud for giving high ratings to risky mortgage bonds that helped bring about the financial crisis.
The government filed a civil complaint late Monday against S&P, the first enforcement action the government has taken against a major rating agency related to the financial crisis.
On Tuesday morning, Iowa Attorney General Tom Miller filed suit in Polk County District Court as part of a coordinated civil law enforcement effort by a group of 15 other state attorneys general, the District of Columbia and the U.S. Department of Justice.
“We allege that S&P misled investors and market participants, which includes Iowa consumers,” Miller said in a prepared statement.
“The company falsely promised that its investment analyses were independent and objective. People relied on these representations to make important financial decisions.”
S&P, a unit of New York-based McGraw-Hill Cos., has denied wrongdoing. It says the government also failed to predict the subprime mortgage crisis.
But the government’s lawsuit paints a picture of a company that misled investors knowingly, more concerned about making money than about accurate ratings. It says S&P delayed updating its ratings models, rushed through the ratings process and was fully aware that the subprime market was flailing even as it gave high marks to investments made of subprime mortgages.
In 2007, one analyst forwarded a video of himself singing and dancing to a tune about the deterioration of the subprime market, with colleagues laughing.
Ratings agencies such as S&P are a key part of the financial crisis narrative. When banks and other financial companies wanted to package mortgages into securities and sell them to investors, they would come to a ratings agency to get a rating for the security.
Many securities made of risky subprime mortgages got high ratings, giving even the more conservative investors, such as pension funds, the confidence to buy them. Those investors suffered huge losses when housing prices plunged and many borrowers defaulted on their mortgage payments.
This arrangement has a major conflict of interest, the government’s lawsuit says. The companies that issued the securities could shop around for whichever ratings agency would give them the best rating.
So the agencies could give high ratings just to get business, the lawsuit contends.
The government’s lawsuit says that “S&P’s desire for increased revenue and market share … led S&P to downplay and disregard the true extent of the credit risks” posed by the investments it was rating.
If S&P is eventually found to have committed civil violations, it could face fines and limits on how it does business. The government said in its filing that it’s seeking financial penalties.
The action does not involve any criminal allegations.