2015 is leaving Standard and Poor’s (S&P) quite a bit poorer. Yesterday, the major credit rating agency agreed to pay $1.375 billion to resolve lawsuits brought against it by the U.S. Department of Justice and attorney generals from 19 states and the District of Columbia regarding S&P’s pre-crisis ratings of mortgage-backed securitizations (MBS) and collateralized debt obligations (CDO). Those lawsuits, the first of which were initiated in 2013, allege that between 2004 and 2007, S&P misrepresented the stringency and objectivity of its ratings—that those ratings were plagued by conflicts of interest that incentivized S&P to artificially inflate the ratings in order to appease the issuers that paid millions of dollars for its services. Consequently, a large number of the MBS and nearly every CDO rated by S&P at that time failed, creating billions of dollars-worth of investor losses.
The “Big Three” ratings agencies (S&P, Moody’s, and Fitch) who have taken considerable public fire for their perceived role in the 2008 mortgage crisis week’s settlements, had previously remained largely unscathed in connection with their activities from that period. The settlement announced this morning constitutes the biggest settlement ever paid by a credit ratings agency. It comes on the heels of the $125 million settlement S&P reached yesterday with the California Public Employees’ Retirement System over the allegedly inflated grades S&P assigned three structured investment vehicles comprised of CDOs, RMBS, and securitized home equity loans. The collapse of those vehicles in 2007 and 2008 cost their retiree investors approximately $1 billion. Continue Reading