Civil Charges To Be Filed Against S&P For Its Exuberant Pre-Crisis Mortgage Ratings

Tyler Durden's picture

Egan-Jones may have been barred from rating sovereigns for 18 months due to missing a comma here or there in its NRSRO application (when everyone knows this was merely retribution for downgrading the US ahead of all the other rating agencies), but now the time has come for that other rating agency which dared to follow in EJ's footsteps and downgrade the US of AmericaAA+ in August 2011 to be punished: Standard & Poors. Moments ago we learned that federal and state prosecutors will five civil charges against S&P for its mortgage bond ratings during the housing crisis.


Certainly if S&P is being targeted so will be the Octogenarian of Omaha's pet rating company, Moody's as well, not to mention French Fitch. Or maybe not: after all these were the two raters who sternly refused to downgrade the US when the country boldly penetrated the 100% debt/GDP target barrier, and which at last check has some 105% in debt/GDP with no actual plan of trimming spending. As in ever.

And in these here united banana states, it is only reasonable to expect that such crony, corrupt behavior is not only not punished but solidly rewarded.

From the WSJ:

The Justice Department and state prosecutors intend to file civil charges alleging wrongdoing by Standard & Poor's Ratings Services in its rating of mortgage bonds before the financial crisis erupted in 2008, according to people familiar with the matter.


The allegations likely would be made in lawsuits by federal and state officials that are expected to be filed as soon as this week, the people said. The alleged wrongdoing by S&P, a unit of McGraw-Hill Cos., MHP -1.68% centers on allegations related to the model used by S&P to rate mortgage bonds.


The likely move by U.S. officials would be the first federal enforcement action against a credit-rating firm for alleged illegal behavior related to the crisis. Several state attorneys general are expected to join the case, making it one of the highest-profile and widest-ranging enforcement crisis-era crackdowns.


The expected civil charges against S&P follow the breakdown of long-running settlement talks between the Justice Department and S&P, the people said.


Many details of the looming enforcement action couldn't be immediately determined, such as why prosecutors are zeroing in on S&P rather than rivals Moody's Corp. MCO -0.92% and Fitch Ratings, a unit of Fimalac SA FIM.FR +0.13% and Hearst Corp.


All three credit-rating firms have faced intense criticism from lawmakers for giving allegedly overly rosy ratings to thousands of subprime-mortgage bonds before the housing market collapsed.


The Financial Crisis Inquiry Commission concluded two years ago that the top credit-rating agencies were "key enablers of the financial meltdown."

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Dewey Cheatum Howe's picture

What chutzpah. I bet this is their way or answering the anonymous threat to leak information. Make it look like your are being tough while kneecapping a bell on the alarm system at the same time. Also looks like it is a public answer to The Untouchables piece. I hope Moyer isn't fooled and calls them out on it and for their prosecution of Egan-Jones.

repete's picture

I like that but how about this

"Bernie Madoff's doin time cause he stole from the rich and not the 99"



venturen's picture

This is like arresting the reporter at the local newspaper instead of the mugger. Hey if you don't like the rating...don't use it. The investment banks with staff multitude bigger, gamed the system and WON!

Joebloinvestor's picture

What we need to see is if the ratings agencies "fold" and get with the program.


Whatever happened to the EU that was gonna form its' own rating agency?

Steve in Greensboro's picture

The U.S. Government is going to sue the rating agencies?  This is like the parricide suing the police for failing to stop him from murdering his parents.

Recommend the rating agencies counter-sue the U.S. government for the actions of Fannie, Freddie, the Federal Reserve (just as Federal as the U.S. Federal Government), et al.

dadichris's picture

all the rating agancies are obviously fraudulent giving an "A" to any government, particularly the US.  After all, anyone who has to borrow more money just to make the minimum payment on their debt is completely past the point of no return. Why aren't they presecuting them for NOT downgrading the US?!?!

Walt D.'s picture

You are applying common sense to an area where common sense is not supposed to be applied.

Alan Greenspan is correct when he says that the US Treasury will not default in that the Federal Reserve will print money to pay the interest or buy iback the notes and bonds. However, don't expect the dollar you lend today to have anywhere near the purchasing power when you receive it back in 10,15 or 30 years. Neither S&P or Moody's consider inflation to be a de facto default, even though it is.

Walt D.'s picture

Here comes the fire truck after the house has burned down.

cristo's picture

I guess this signals that a US downgrade is imminent .Just some political cover for Obama to blame the downgrade as a retaliation from the rating agencies for these civil charges

MFLTucson's picture

The fuckin bullies are back at it knowing downgrade 2 should have already happened!  Disgusting thug!

Number 156's picture

Cmon FED. You really dont want to do that.  Your witnesses will be cross-examined, and the evidence that you would not want to see the light of day will expose you.

Pike Bishop's picture

Civil charges are hilarious. Civil fines get put against revenues. They are a 'cost" of doing business, So shareholders get fucked somewhat. But it's a reduction on taxable proceeds of the business. Whatever the civil fines are, the company gets a "refund' on the fine at the company's effective tax rate. So, tax revenues get a little fucked, too.

As long as the price of Vaseline doesn't go up, I think we'll all be fine.

dunce's picture

I am not sure what crime they might be charged with or how they could be punished. Suppose the govt. fined them the total value of the company and put them out of business, the stock holders would lose every thing, but they did not do anything but invest in the company. How would anything be better after the company was out of business. The real assets walk out the door every day at quitting time. The govt, could own an empty building. Supposedly they provided a needed service. Who will then supply that need? What investor would trust the credit rating of a govt. bureaucrat. No one trusts these companies anymore any way after rating sub-prime mortgages AAA. Will this prosecution do anything to fix our broken market?