Justice planning charges against S&P for financial crisis ratings

By Peter Schroeder - 02/04/13 02:55 PM ET

Credit rater Standard & Poor's announced Monday that the Justice Department plans to file civil charges against it for its rating of mortgage-backed financial products leading up to the financial crisis.

In a statement, S&P acknowledged that it missed the mark in many of its ratings before the crisis, but said such a suit would be "entirely without factual or legal merit."

The Wall Street Journal reported Monday that the federal enforcement action, the first of its kind against a credit rater for actions tied to the meltdown, could come as soon as this week. The civil charges would come after the Justice Department and S&P failed to strike a deal in long-running settlement talks.

Several state attorneys general are expected to join the case.

The rating agency contended that while many of its ratings at the time were too high, it acted quickly to lower those ratings to a more appropriate level, and were the first among raters to take steps to require tougher standards on mortgage products receiving a 'AAA' rating.

"S&P deeply regrets that our CDO ratings failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time," the agency said. "However, we did take extensive rating actions in 2007.

"With 20/20 hindsight, these strong actions proved insufficient – but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith," the rater added in its statement.

Credit raters have faced intense scrutiny from policymakers for their actions leading up to the financial crisis, as they assigned top-shelf credit ratings to complex mortgage products that ultimately proved far riskier. A 2011 report from the Senate Permanent Subcommittee on Investigations accused raters of handing out AAA ratings in order to secure "lucrative fees" from Wall Street firms.

Credit raters currently operate under an "issuer pay" model, wherein issuers pay raters to provide a rating to their financial product. Critics have argued this method creates a conflict of interest for credit raters, and implicit pressure to provide higher ratings.

The Senate report found that more than 90 percent of AAA ratings given to mortgage-backed securities in 2006 and 2007 — as the subprime mortgage crisis reached its peak — ultimately were downgraded to junk status.

Fellow raters Moody's Investors Service and Fitch Ratings have been similarly criticized, but no similar cases against them have been reported. S&P became the first credit rater to downgrade the United States's credit rating

According to the Journal, the government's case will challenge the model S&P used to provide ratings to mortgage bonds. Raters, which have faced a slew of lawsuits since the financial meltdown, have argued that their methods are protected under the First Amendment.

The Justice Department declined to comment.

This post updated at 3:47 pm.