Critics Rip Standard & Poor’s Settlement

Standard & Poor’s Financial Services and its parent McGraw Hill Financial Inc. will pay $1.375 billion to settle charges S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).

The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia.


Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks.

Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.

The settlement did not sit well with critics the Justice Department’s handling of corporate crime cases.

Public Citizen’s Bartlett Naylor said that “the treatment of Wall Street remains a broken record in every way.”

“While asserting a massive fraud, the Department of Justice’s settlement means no individual is going to jail,” Naylor told Corporate Crime Reporter. “The company remains in business. Taxpayers will actually subsidize the penalty.”

Naylor said that while the Justice Department’s original lawsuit against S&P names names, “today’s settlement names no one” and that while Standard & Poor’s was one of the “essential cogs in the wheel of financial destruction” it walked away with a “traffic fine.”

University of Virginia School of Law’s Brandon Garrett, author of  Too Big to Jail: How Prosecutors Compromise with Corporations (Harvard University Press, 2014), said the S&P settlement was “another out of court settlement in a major financial crisis related case.”

“Once again, there was not an admission of wrongdoing in the settlement,” Garrett said.  “As with the other settlements, there was no statement clarifying the tax deductibility of the payments. There have not been individual charges in the case.  And it is hard to know what to make of the payments in the settlement, when there was no calculation of the total gains to S&P or the total losses to victims.”

Dennis Kelleher of Better Markets called the settlement “grossly inadequate.”

“Ironically, the claims being made about the settlement appear to be as inflated as the credit ratings were in the years before the financial crash,” Kelleher said. “For what is allegedly years of egregious, reckless conduct, all the Department reportedly got was a big dollar settlement and big headlines, but not one admission of fault; not one individual punished; and, no detailed disclosure of exactly what S&P did; who at S&P did it; how S&P profited; and, who was harmed and by how much. The American people deserve much better.”

“Allowing S&P to eliminate its liability merely by using shareholders’ money to pay a settlement, however big, seven years after the crash is not a meaningful punishment. Department’s pattern of these types of settlements will not deter future wrongdoing. Indeed, future illegal conduct is not only incentivized, but virtually guaranteed when DOJ refuses to identify, much less punish, individuals and when it fails to publicly disclose all the material facts of the fraud, including how it was done and how much the firm made.”

“This is particularly important here because rating agencies are crucial professional gatekeepers (like accountants) meant to stand independently and skeptically between Wall Street and investors big and small. There would likely have been no housing bubble inflated by home mortgages and no financial crash in 2008 if trillions in toxic securities and derivatives weren’t awarded the Triple-A gold standard by these trusted gatekeepers. After they gave their seal of approval to these toxic securities, Wall Street packaged and sold them throughout the world to unsuspecting investors who believed the ratings and thought they were virtually riskless. These Triple-A rated securities were the financial time bombs that exploded in 2008 and the American people have been suffering and paying the price ever since.”

In addition to the payment of $1.375 billion, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts.  It has further agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States.  Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws.

“On more than one occasion, 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,” said Attorney Genera Ericl Holder.  “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business.  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.”

As part of the resolution, S&P admitted facts demonstrating that it misrepresented itself to investors and the public, allowing the pursuit of profits to bias its ratings.

S&P also agreed to retract its unsubstantiated claim that this lawsuit was initiated in retaliation for the decisions S&P made about the credit rating of the U.S. government.

Half of the $1.375 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency.  The remaining $687.5 million will be divided among the 19 states and the District of Columbia.  The allocation among the states and the District of Columbia reflects an agreement between the states on the distribution of that money.

In its agreed statement of facts, S&P admits that its decisions on its rating models were affected by business concerns, and that, with an eye to business concerns, S&P maintained and continued to issue positive ratings on securities despite a growing awareness of quality problems with those securities.

S&P acknowledges that:

* S&P promised investors at all relevant times that its ratings must be independent and objective and must not be affected by any existing or potential business relationship;

* S&P executives have admitted, despite its representations, that decisions about the testing and rollout of updates to S&P’s model for rating CDOs were made, at least in part, based on the effect that any update would have on S&P’s business relationship with issuers;

* Relevant people within S&P knew in 2007 many loans in RMBS transactions S&P were rating were delinquent and that losses were probable;

* S&P representatives continued to issue and confirm positive ratings without adjustments to reflect the negative rating actions that it expected would come.

In addition, S&P acknowledges that the voluminous discovery provided to S&P by the United States in the litigation does not support their allegation that the United States’ complaint was filed in retaliation for S&P’s 2011 decisions on the credit rating of the United States.

S&P will formally retract that claim in the litigation.

“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Acting U.S. Attorney Stephanie Yonekura.  “Driven by a desire to increase profits and market share, S&P blessed innumerable securitizations that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off.  This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone.  This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”

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