Credit ratings firm Standard & Poor’s has reached a nearly $1.4 billion settlement with the Justice Department and several states over allegations the company defrauded investors in the lead-up to the 2008 financial crisis by giving risky mortgage bonds its highest rating.
Under the terms of the deal, S&P will pay $687.5 million to the Justice Department and another $687.5 million to the attorneys general in 19 states and the District of Columbia, the ratings firm announced on Tuesday. The settlement resolves a lawsuit brought by DOJ in February 2013 over ratings the firm issued between 2004 and 2007 on mortgage-backed securities and complex collateralized debt obligations that were central to the financial market’s collapse.
The role of ratings firms in the 2008 crisis continues to be a sore spot with critics of the companies arguing they continue to dominate the market and more should be done to reform the role they play in financial markets. The settlement is the most significant action taken by the government to crackdown on the firms for the role they played in the financial crisis.
The 2013 lawsuit alleged that S&P knew how flawed the home loans backing the bonds were, but rubber-stamped them AAA anyway in order to please banks selling the securities as it tried to gain more market share. S&P has defended its ratings, noting they were based on the same data and information available to other companies and government officials, who also concluded that trouble in the housing market would be fleeting.
And to bolster its case, S&P argued the lawsuit was retaliation for the company’s 2011 downgrade of U.S. government debt. Amid a political showdown over the government’s borrowing limit, S&P downgraded the U.S. credit rating to AA+ from AAA in August 2011. In court filings, Harold McGraw III, CEO of S&P’s parent company McGraw Hill Financial, said that two days after the downgrade Treasury Secretary Timothy Geithner called and warned him that the ratings firm had made an error in its analysis.
Justice said on Tuesday that as part of the settlement S&P has agreed to withdraw its allegation that the lawsuit was filed in retaliation for the credit downgrade. Earlier this month, S&P settled with the Securities and Exchange Commission and two states for questionable ratings the company gave to commercial mortgaged-backed securities.