Standard & Poor’s to Pay Nearly $1.4 Billion Over Inflated Ratings
Standard & Poor’s will pay nearly $1.4 billion to settle government allegations that it intentionally issued better-than-warranted ratings on mortgage-related bonds that helped fuel the financial crisis. The fine also settled suits filed by the attorneys general of 19 states as well as the District of Columbia. The allegations involved S&P ratings issued by the firm between 2004 and 2007 that made numerous mortgage-backed securities appear like safer investments than they actually were. The S&P settlement is also expected to provide a framework for similar action against the other two major ratings agencies, Moody’s Investors Service and Fitch Ratings. Under the terms of the settlement, S&P was not required to admit any wrongdoing.
The US Justice Department initially filed charges against S&P about two years ago. The company was accused of issuing higher ratings because of the impact negative ratings would have on its ratings 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,” read a statement from US Attorney General Eric Holder. The government initially sought penalties of about $5 billion, but ended up settling for a penalty of $1.38 billion. Observers believe the settlement sets the stage for the government to file similar action against Fitch and Moody’s.
S&P, Fitch and Moody’s have been widely blamed for the worst economic downturn in the US since the Great Depression. The firms’ inflated ratings of high-risk securities allowed banks to sell trillions of dollars worth of the investments, even to pensions funds and other investment vehicles that only buy into investments if they meet a minimum credit rating. When the housing market collapsed in 2006, hundreds of pensions and seemingly safe investment vehicles went bankrupt, dashing the retirement hopes of millions of Americans. One of those pensions is the state of California’s Public Employees’ Retirement System, which lost millions of dollars on three investments made due to inflated S&P ratings. The company also announced on Tuesday it had settled with the California PERS, agreeing to pay $125 million in damages.