Here is the basis of the case the U.S. government is making against Standard & Poor’s Ratings Services in a 128-page lawsuit:
—The charge: The government accuses S&P of knowingly giving high grades to risky mortgage-backed securities from about 2004 to 2007. The mortgages underlying those securities later imploded, causing investors billions of dollars in losses.
—The background: S&P is an agency that assigns ratings to investments. When an investment has a high rating, the risk is considered low. Even the most conservative investors, like some pension funds, feel confident enough to buy it.
Banks and other financial firms approach S&P and other major rating agencies when they have an investment that needs to be rated. The system contains an oddity: The banks not only pay for the ratings they receive but can also shop around to see which rating agency might give them the highest marks. This creates a conflict of interest: To earn business from the banks, the rating agencies can feel pressure to give high grades to the banks’ investment products.
—The details: The government says S&P knowingly gave high grades to banks’ risky mortgage-backed securities that later soured because it wanted to earn more business from the banks.
—The business model: To support its claims, the government refers to comments from S&P executives that they wanted their ratings to be handled in a “business friendly” way. The lawsuit also points to emails in which an S&P analyst says executives fear angering the banks by assigning low ratings to their securities. In another email, an analyst complains about missing out on a deal because S&P’s criteria on a rating were stricter than those of its rival Moody’s.
—What they knew: The government also refers to emails in which S&P employees appear to know how severe the subprime mortgage crisis is, even though they still had high ratings on subprime-backed mortgage bonds. In one report, the performance of subprime investments was so bad that S&P employees thought the numbers must be typos. One analyst emailed a video of himself singing about the collapse of subprime mortgages, with colleagues laughing.
—The government’s role: The Justice Department is the government arm that filed the lawsuit. The government has an obligation to make investing fair and safe. But it’s also been accused of failing to aggressively pursue wrongdoing related to the financial crisis. It has been under pressure to show it can bring and win lawsuits.
—The significance: This is the first time the federal government has filed a lawsuit against one of the major credit rating agencies over actions related to the financial crisis. S&P is also known as the rating agency that downgraded long-term U.S. debt in 2011.
—The defense: S&P denies wrongdoing and says it can’t be blamed for failing to predict the unpredictable financial crisis. It points out that the government was also saying as late as 2007 that the subprime crisis would likely be contained. S&P also says the lawsuit has taken its emails out of context.
It says it “deeply regret(s)” that some investments didn’t perform as well as expected. But S&P adds, “20/20 hindsight is no basis to take legal action against the good-faith opinions of professionals.”
More Related Stories
- If Alex Pareene was a cable news executive...
- El Salvador court delays ruling on abortion case while woman's life hangs in the balance
- UK officials: Radical Islam behind London attack
- Pa. governor "can't find" any Latinos to work in his administration
- London machete attack could be linked to terrorism
- Conservative group blames military sexual assault on "Don't Ask, Don't Tell" repeal
- Lois Lerner, IRS disaster
- Donald Rumsfeld worried that marriage equality will lead to polygamy
- Experts: Fox News spying scandal a game-changer
- San Francisco Giant Jeremy Affeldt apologizes for homophobic past
- 9-year-old slams Rahm over Chicago schools
- Stockholm riots rage for third day
- Wall Street firm's "Golden Pitchbook" is totally sexist, full of lies
- Must-see morning clip: Toronto's eccentric and allegedly crack-smoking mayor
- Federal court strikes down Arizona abortion ban
- Jodi Arias: I deserve a second chance
- Oklahoma residents return home to pick up the pieces
- Florida man with connection to Tsarnaev killed by FBI
- FBI identifies 5 Benghazi suspects
- Here come the tornado truthers. Already
- Peace Corps to allow gay couples to volunteer together
Featured Slide Shows
The week in 10 picsclose X
- 1 of 11
Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
Credit: AP/LM Otero
Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
Credit: AP/Matt Rourke
A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
Credit: AP/Jenny Aicher
Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
Credit: AP/Molly Riley
Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
Credit: AP/J. Scott Applewhite
Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
Credit: AP/Carolyn Kaster
O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
Credit: AP/Las Vegas Review-Journal/Jeff Scheid
Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
Credit: AP/NASA/Chris Hadfield
When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
Credit: AP/Jacquelyn Martin
A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
Credit: AP/The Duluth News-Tribune/Clint Austin
Recent Slide Shows
- 1 of 11