American private financial services company Standard & Poor’s (S&P), a division of The McGraw-Hill Companies which publishes financial research and analysis on stocks and bonds, has said that it will face a lawsuit from the United States government over its inaccurate ratings of mortgage-related investments in the run-up to the financial crisis, reported CNN. The ratings agency said in a statement that the United States Department of Justice ‘has informed the company that it intends to file a civil lawsuit against Standard & Poor's focusing on its ratings in 2007 of certain US collateralised debt obligations’, investments based on pools of mortgages.
S&P called the potential lawsuit ‘entirely without factual or legal merit’. The firm said that it ‘deeply regrets’ the fact that its ratings ‘failed to fully anticipate the rapidly deteriorating conditions in the United States mortgage market’. However, it said that it relied on the same data as United States government officials and other analysts who, too, had failed to predict the housing bust. The US Department of Justice has not made any comment.
S&P is a division of McGraw-Hill, shares of which dropped sharply on the news, closing down 13.8 per cent. Shares of fellow ratings agency Moody’s fell 10.7 per cent. Moody's declined to comment while a spokesman for Fitch, the other of the big three ratings agencies, told CNN that the firm has ‘no reason to believe Fitch is a target of any such action’.
Analysts have long pointed to ratings agencies as key culprits in the financial crisis. Wall Street firms and investors rely on the agencies to analyse risk and give debt a ‘grade’ that is supposed to reflect the borrower’s ability to pay the underlying loans.
The safest investments are rated ‘AAA’. In the years preceding the global financial meltdown in 2008, large numbers of mortgage-backed securities received AAA ratings, only to fail as the United States housing market collapsed.
Critics say that because the major ratings agencies are paid by banks and other issuers of securities rather than investors, they succumbed to a conflict of interest in giving their seals of approval to dubious investments.
‘Credit rating agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability. And they did it for the money,’ CNN quoted United States Senator Carl Levin as saying in a 2010 hearing.
A 2011 US Senate report on the financial crisis said that the agencies had ‘weakened their standards as each competed to provide the most favourable rating to win business and greater market share’.
S&P called the potential lawsuit ‘entirely without factual or legal merit’. The firm said that it ‘deeply regrets’ the fact that its ratings ‘failed to fully anticipate the rapidly deteriorating conditions in the United States mortgage market’. However, it said that it relied on the same data as United States government officials and other analysts who, too, had failed to predict the housing bust. The US Department of Justice has not made any comment.
S&P is a division of McGraw-Hill, shares of which dropped sharply on the news, closing down 13.8 per cent. Shares of fellow ratings agency Moody’s fell 10.7 per cent. Moody's declined to comment while a spokesman for Fitch, the other of the big three ratings agencies, told CNN that the firm has ‘no reason to believe Fitch is a target of any such action’.
Analysts have long pointed to ratings agencies as key culprits in the financial crisis. Wall Street firms and investors rely on the agencies to analyse risk and give debt a ‘grade’ that is supposed to reflect the borrower’s ability to pay the underlying loans.
The safest investments are rated ‘AAA’. In the years preceding the global financial meltdown in 2008, large numbers of mortgage-backed securities received AAA ratings, only to fail as the United States housing market collapsed.
Critics say that because the major ratings agencies are paid by banks and other issuers of securities rather than investors, they succumbed to a conflict of interest in giving their seals of approval to dubious investments.
‘Credit rating agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability. And they did it for the money,’ CNN quoted United States Senator Carl Levin as saying in a 2010 hearing.
A 2011 US Senate report on the financial crisis said that the agencies had ‘weakened their standards as each competed to provide the most favourable rating to win business and greater market share’.