The immensely powerful Standard & Poor’s credit rating agency will pay a whopping $1.375 billion to settle charges brought by 19 states, the District of Columbia and the federal government, Attorney General Eric Holder announced Tuesday.
Flanked by officials, including Mississippi Attorney General Jim Hood, who filed an early lawsuit against S&P in 2011, Holder called the global settlement proof that “no financial institution, at home or abroad, is too powerful to be held accountable for wrongdoing.”
“S&P claimed that its ratings were independent, objective and not influenced by the company’s relationship with the issuers,” Holder said at a news conference. “In reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire for increased profits and market share to favor the interests of issuers over investors.”
The big settlement resolves charges that S&P inflated the credit-worthiness of fatally flawed mortgage-backed investments. Lured in by the credit agency’s stamp of approval, investors in the United States and abroad gobbled up what turned out to be highly risky mortgage securities only to see their value tank when the housing market crashed.
Justice Department and state officials claimed that the credit raters had brushed off or hidden the riskiness of the investments for fear of losing business.
“The credit rating agencies portrayed themselves as pure as the driven snow,” Hood said. “You expected the banks to do some things slippery, but the credit rating agencies are really supposed to be (different).”
The federal government will take half of the settlement amount while the individual states that took on the company will share the remaining $687.5 million. Mississippi, as one of five states helping manage the complex litigation, will receive $29 million.
Other states that had filed lawsuits, including Idaho, Missouri, North Carolina, South Carolina and Pennsylvania, will receive $22 million each.
The California Public Employees’ Retirement System will receive $125 million to settle a separate but related lawsuit, in addition to $210 million that the state will receive for the multi-state litigation. California’s share is larger than the other states in part because it includes both a penalty and damages for financial losses suffered by CalPERS and the California State Teachers’ Retirement System.
“S&P profited by misleading investors who trusted its ratings,” California Attorney General Kamala Harris said in a statement. “California’s public pension funds suffered significant losses due to S&P’s failure to honestly and accurately disclose the risk” of the investments.
The financial settlement amounts to the largest penalty of its kind ever imposed on a credit rating agency. Another credit-rating agency, Moody’s Investors Service, is facing similar consumer protection state lawsuits filed by Mississippi and Connecticut. Officials on Tuesday declined to discuss whether the Justice Department is also involved.
For its part, the Justice Department relented on a demand that Standard & Poor’s acknowledge that it had committed fraud. This was an important victory for the company, to protect it from private lawsuits.
“After careful consideration, the company determined that entering into the settlement agreement is in the best interests of the company and its shareholders and is pleased to resolve these matters,” S&P said in a statement.
Formally called Standard & Poor’s Financial Services LLC, the company is a division of McGraw Hill Financial Inc. It is one of the nation’s handful of credit-rating companies, which assess the risk and stability of bonds and other financial products. The agencies are paid by those who are issuing the financial products; creating the potential, critics have long said, for a conflict of interest.
The settlement announced Monday involved the company’s handling of “ residential mortgage-backed securities” and “ collateralized debt obligations” between 2004 and 2007. Many of the packages in question turned out to be based on high-risk mortgages likely to default.
As part of the agreement announced Tuesday, company officials acknowledged that in the heat of last decade’s mortgage bubble, some executives worried that severely downgrading credit ratings would cost the company business.
One supervisor “regularly complained that she was prevented by S&P executives from downgrading” investments because of the corporate concerns, an agreed-to “statement of facts” states.
“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,” Holder said.
Mississippi filed an early negligence lawsuit targeting both banks and S&P, but it did not go far. That changed, Hood said, when Connecticut’s then-attorney general, Richard Blumenthal, suggested the states could go after the company on consumer protection grounds.
Blumenthal, a Democrat, now serves in the U.S. Senate.
“We were in dire straits in litigation,” Hood said. “Thank goodness the Justice Department and the . . . other states came in.”
The Justice Department filed its own lawsuit two years ago. The legal wrangling grew ugly and very tangled at times, with S&P charging that the Obama administration was retaliating for the company’s embarrassing 2011 downgrading of the U.S. government’s own credit rating. As part of the settlement, S&P is formally retracting those allegations, which Holder termed “utter nonsense.”