Here is the basis of the case the U.S. government is making against Standard & Poor’s Ratings Services in a 128-page lawsuit:
THE CHARGE
The government accuses S&P of knowingly giving high grades to risky mortgage-backed securities from about 2004 to 2007. The mortgages underlying those securities later imploded, costing investors billions in losses and helping fuel the 2008 financial crisis.
THE BACKGROUND
Banks and other financial firms approach S&P and other major rating agencies when they have an investment that needs to be rated. The system contains an oddity: The banks not only pay for the ratings they receive but can shop around to see which rating agency might give them the highest marks. This creates a conflict of interest: To earn business from the banks, the rating agencies can feel pressure to give high grades to the banks’ investment products.
THE DETAILS
The government says S&P knowingly gave high grades to banks’ risky mortgage-backed securities that later soured because it wanted to earn more business from the banks.
The government refers to comments by S&P executives that they wanted their ratings to be handled in a “business friendly” way. The lawsuit also points to emails in which an S&P analyst says the company’s executives fear angering the banks by assigning low ratings to their securities. In another email, an analyst complains about missing out on a deal because S&P’s criteria on a rating were stricter than those of rival Moody’s. The government also refers to emails in which some S&P employees appear to know how severe the subprime mortgage crisis is, even though they still had high ratings on subprime-backed mortgage bonds.
This is the first time the federal government has filed a lawsuit against a major credit rating agency over actions related to the financial crisis. S&P is also known as the rating agency that downgraded long-term U.S. debt in 2011.
THE DEFENSE
S&P denies wrongdoing and says it can’t be blamed for failing to predict the crisis. It notes that the government was also saying as late as 2007 that the subprime mortgage crisis would likely be contained. S&P says the lawsuit has taken its employees’ emails out of context.
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