Standard & Poor’s (S&P) has agreed to pay a $1.38 billion settlement to US regulators over allegations it knowingly inflated its ratings of risky mortgage bonds.
The deal with the Department of Justice also resolves 19 other lawsuits.
McGraw Hill – the parent company of S&P – said in a statement the “settlement contains no findings of violations of law”.
S&P is the first credit agency fined over financial crisis-era violations.
The settlement covers mortgage bond ratings between 2004 and 2007.
The bonds, which included sub-prime mortgages, were blamed for the collapse of the US property market and subsequent global financial crisis.
The DoJ filed civil fraud charges against S&P two years ago.
It accused the credit rating firm of giving top recommendations – known as triple-A ratings – to mortgage bonds that it knew contained sub-prime mortgage debt and were therefore not as safe an investment as the rating suggested.
The US government said that S&P’s ratings encouraged financial institutions around the world to buy and sell what proved to be “toxic” financial products in their trillions.
It also accused S&P of failing to warn investors that the housing market was collapsing in 2006 because doing so would have hurt its business.
At the time, S&P said the US government’s case was entirely without factual or legal merit.
“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Eric Holder in a statement announcing the settlement.
“As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets, because it was worried that doing so would hurt the company’s business.
“While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”
S&P will pay $687.5 million to the DoJ and a further $678.5 million to the 19 states that had brought lawsuits against it.
The ratings agency will also pay $125 million in a separate settlement with the California Public Employees’ Retirement System.
[youtube f0yAnCt2Aw8 650]
Dow Jones index rose above 16,000 points for the first time and the broader Standard and Poor’s passed through the 1,800.
Traders are optimistic about the prospect of the Federal Reserve continuing its cheap money policy.
Lower interest rates mean investors are driven to find investments where they will gain higher returns.
Interest rates are close to nothing in the US and are expected to stay there.
Dow Jones index rose above 16,000 points for the first time and the broader Standard and Poor’s passed through the 1,800
Although the current chairman of the Federal Reserve, Ben Bernanke, is leaving the post, Janet Yellen, who is all but certain to take over from him, is expected to keep the money flowing while the US economy remains fragile.
The economy is growing, but is not thought to be on solid enough ground to withstand the shock that could be caused by a change in policy.
Earlier this month, it was announced that the US economy grew at a better-than-expected annual pace of 2.8% in the third quarter.
However, the latest figures also showed that the unemployment rate edged up to 7.3% from 7.2% in September.
The gains that put stocks in record grounds were modest.
The Dow Jones was up 39.7 points at 16,001.4 points.
The Standard and Poor’s was up 2 points at 1,800.40 points.
[youtube ALq0QKEoz_k 650]
S&P has cut France’s credit rating to AA from AA+.
The move comes almost two years after France lost its top-rated AAA status.
S&P said it downgraded France because high unemployment in the country was making it hard for the government to make important reforms which would boost growth.
S&P has cut France’s credit rating to AA from AA+
The French government responded by saying that its debt rating was one of the safest in the eurozone.
The country’s Finance Minister, Pierre Moscovici, said S&P had made “inaccurate criticisms” of his country.
Pierre Moscovici said in a statement: “During the last 18 months the government has implemented major reforms aimed at improving the French economic situation, restoring its public finances, and its competitiveness.”
In theory, a lower credit rating makes borrowing more expensive.
Standard & Poor’s has announced it is to be sued by the US government over the credit ratings agency’s assessment of mortgage bonds before the financial crisis.
The civil lawsuit would focus on S&P’s high ratings in 2007 for some mortgage-backed securities that later collapsed in value, said the agency.
S&P says the case is entirely without factual or legal merit.
The suit would be the first such case over alleged wrongdoing by a ratings agency tied to the financial crisis.
S&P said the justice department had informed them of the impending civil suit, although the federal agency declined to comment.
The move follows a breakdown in talks between the justice department and S&P, the Wall Street Journal reports.
Several states are expected to join the suit, US media report.
Shares in S&P’s owner, the US publishing and media group McGraw Hill, fell 14% on Wall Street on Monday following the announcement, while those in fellow ratings agency Moody’s fell 10% – indicating the market expects that they may be next in the justice department’s sights.
S&P and other agencies have faced criticism from investors, politicians and regulators for assigning their top AAA ratings to thousands of subprime and other mortgage securities that later collapsed in value.
Such agencies are paid by the issuers of bonds and other securities for ratings, raising concern about potential conflicts of interest.
Standard & Poor’s has announced it is to be sued by the US government over the credit ratings agency’s assessment of mortgage bonds before the financial crisis
Grades assigned by these firms can affect a company’s ability to raise or borrow money as well as how much investors will pay for their securities.
In the case of the subprime mortgage bubble, ratings agencies including S&P were hired to assess collateralized debt obligations (CDOs) – complex financial transactions that packaged together thousands of loans to individual homebuyers.
The ratings agencies’ job was to assess the likelihood that the home loans – and therefore the CDOs – would ultimately be repaid. Their ratings enabled the investment banks which put the CDOs together to then sell them to investors around the world.
In its January 2011 report, the US Financial Crisis Inquiry Commission called the agencies “essential cogs in the wheel of financial destruction” and “key enablers of the financial meltdown”.
S&P has previously disclosed a Securities and Exchange Commission (SEC) investigation into its rating of a specific $1.6 billion CDO known as Delphinus CDO 2007-1.
Delphinus was the basis of a $127 million settlement by Mizuho Financial Group over allegations that the US unit of the company obtained false credit ratings for the CDO using millions of dollars in dummy assets.
It is unclear if Delphinus is included in the expected civil suit.
S&P has also faced lawsuits from investors, and argues its ratings constitute opinions protected by the First Amendment to the US Constitution.
The firm says it “deeply regrets” how its CDO ratings failed to anticipate mortgage market conditions as the financial crisis hit, and that it has since spent $400m to help bolster the quality of its ratings.
“Every CDO that [the department] has cited to us also independently received the same rating from another rating agency,” S&P said in a statement on Monday.
“The Department of Justice would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.”