S&P Settles Claims for Over 1 Billion Dollars

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Summary: S&P has settled claims stemming from the financial crisis with the Justice Department, many of the individual states, and other entities for $1.5 billion.

According to Bloomberg, Standard & Poor has settled with the U.S. Justice Department, several states, and the largest pension fund in the country for an impressive $1.5 billion. According to the New York Times, the settlement does not require judicial approval. The world’s biggest rating company will now be able to put a tough legal battle behind it.

  

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S&P is a unit of McGraw Hill Financial Inc. It will now have to pay over a year’s worth of profits to settle claims that it inflated subprime-mortgage bond ratings during the 2008 financial crisis. S&P quietly settled without any admissions of wrongdoing. Now that the legal fight has ended for S&P, it can close a profit gap with Moody’s Corp., its biggest competitor.

The $1.375 billion settlement will be divided evenly with the Justice Department, 19 states, and the District of Columbia. The case has dragged on for two years, during which S&P alleged the Justice Department was unfairly hard on the company after it decided in 2011 to downgrade U.S. sovereign debt to AA+ from AAA.

However, in today’s settlement, S&P instead noted that there was no evidence that the United States acted in retaliation. S&P was the sole credit rater the agency sued, even though S&P’s competitors issued top ratings for similar securities.

Read about the claims of retaliation here.

A separate settlement was reached with the California Public Employees Retirement System (Calpers) to finalize claims over three structured investment vehicles. That settlement was for $125 million.

Attorney General Eric Holder said, “The company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised. 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.”

S&P acknowledged that its rating decisions were affected by businesses interests, although it denied this fact when the lawsuit was first filed two years ago. To increase its business, S&P gave top grades to bonds that were really built from subprime mortgages that investors felt were safe as debt from the federal government. However, when housing prices declined, the bonds defaulted, which froze credit markets and started the worst recession since the 1930s.

Mississippi Attorney General Jim Hood said, “The credit rating agencies portrayed themselves as if they were as pure as driven snow. You expected the banks to do some things slippery, but the credit rating agencies were supposed to be the ones we looked to.”

S&P and government regulators “settled this matter to avoid the delay, uncertainty, inconvenience, and expense of further litigation,” according to Catherine Mathis, an S&P spokeswoman. The company’s 2014 financial statements will reflect the settlements, as will its fourth-quarter results that are scheduled to be released on February 12.

The settlement is a heavier blow to S&P than last year’s deals reached with financial institutions that admitted they misled investors about the quality of securities created from subprime loans. S&P’s settlement is equivalent to roughly a year and a half of McGraw Hill’s profits.

The Justice Department reached a $16.7 billion settlement with Bank of America Corp., which represented a promise that the bank would either write down or forgive mortgage-holder debt. Bank of America’s cash payout was $9.7 billion, roughly 85 percent of its profit from the previous year. In addition, Citigroup settled for $7 billion with a $3.8 million cash payout, which was roughly equal to its second-quarter profits from 2014.

Read about the Bank of America settlement here.

McGraw Hill netted income of approximately $964 million last year.

Toward the end of 2012, the Justice Department initiated settlement negotiations with S&P over the company’s rating of subprime mortgage-backed bonds. Those discussions hit a roadblock when S&P refused to admit to any wrongdoing, an insider stated.

In February 2013, the Justice Department filed a suit against S&P, accusing it of awarding investment-grade ratings to securities to win business. In addition, the suit accused S&P of lying about its rankings having no conflicts of interest.

Harold W. McGraw III, the chairman of McGraw Hill, stated through court documents that Timothy Geithner, the Treasury secretary at that time, called him a few days after S&P downgraded the debt in August 2011 and informed him that S&P would be held liable for its actions. Geithner apparently said that there would be a “response” to the downgrade, and in February 2013 McGraw said that his company would “vigorously” fight against the claims, which he called “meritless.”

However, the Justice Department clalims that its investigation was launched before Geithner made any comments to McGraw. S&P’s attorneys asked the government to turn over documentation related to its decision to sue S&P, and in April 2014, Judge David Carter ruled that the company should be allowed to inspect the documents.

A few months afterward, government attorneys contacted S&P’s legal team about reaching a settlement.

Last March, a judge ruled that S&P must face claims.

During that time, the legal strategy implemented by McGraw Hill began to change. In July of 2014, Douglas Peterson, the new chief executive officer, hired Lucy Fato as the top lawyer of the firm and tried to finalize the claims.

The government also made concessions in the settlement. Initially, the Justice Department sought up to $5 billion in civil penalties against S&P for the losses it caused.

S&P also settled a case with the Securities & Exchange Commission on January 21. In that settlement, S&P agreed to pay roughly $80 million to both state and federal authorities due to claims it misled investors in 2011 about commercial-mortgage backed security ratings. A one-year suspension against S&P in that part of the market was also part of the terms of that settlement.

McGraw Hill sold its publishing unit to Apollo Global Management LLC in March 2013 for $2.4 billion, and has continued as a financial services provider since. S&P now encompasses roughly half of McGraw Hill’s revenue. Other businesses that are part of McGraw Hill include S&P Dow Jones Indices, which licenses benchmarks, and S&P Capital IQ, a financial data provider.

Separately, the Justice Department is trying to investigate whether Moody’s Investors Services also inflated ratings during the housing boom. According to the Wall Street Journal, Moody’s made it possible for even conservative investors to purchase securities backed by subprime loans that were later revealed to be risky. The Justice Department has been seeking this information for over five years. The government is interviewing former executives from the company on whether criteria were bent to gain business form Wall Street banks. However, it is unclear as to whether a lawsuit will result.

Source: Bloomberg

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