By CCTV correspondent Karina Huber
In the bid to bring those responsible for the financial crisis of 2008 to justice, the focus has now shifted to ratings agencies. For the first time ever, a ratings agency has been accused by the US government of fraud and giving overly optimistic ratings on mortgage bonds just before the financial crisis.
Standard & Poor’s, or "S&P" - the world’s largest ratings agency for financial securities, and its parent company McGraw Hill face a five billion dollar civil law suit by the U.S. Justice Department, claiming that S&P willingly defrauded investors.
US Attorney General Eric Holder said, "S&P mislead investors including many federally insured financial institutions, causing them to lose billions of dollars."
The suit centers around 40 complex securities called "collateralized debt obligations," or "CDO’s" - home loans bundled into tradable securities in 2007, which then went sour when millions of Americans began defaulting on their mortgages a year later.
The Justice Department claims S&P gave rosy ratings to these CDOs even though the agency knew the securities included risky, so-called "sub-prime" loans, lent to borrowers likely to miss their mortgage payments.
Financial institutions paid S&P roughly 13 million dollars for rating the bonds in question. At issue is whether ratings agencies can be truly independent when their clients are also those responsible for creating the assets that are rated.
The case relies heavily on employee emails. One S&P staffer wrote about the CDO market: "Let’s hope we are all wealthy and retired by the time this ‘house of cards’ falters."
Standard & Poor’s says the suit is without legal merit and unjustified. It denies that the ratings were issued in bad faith and says even US lawmakers remained optimistic about the housing market.
Howard Meyers, Professor of Law from New York Law School, said, "I think ratings agencies in general have to revisit their own internal policies and make it clear to investors what it is exactly they are doing and what it is they’re not doing so investors can make an informed decision."
The suit was filed after talks between the Justice Department and the S&P reportedly fell apart. The Justice Department reportedly wanted an admission of guilt and a penalty of 1 billion dollars - 10 times more than the amount S&P considered fair.
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- U.S. sues S&P for pre-crisis mortgage rating fraud 2013-02-06