S&P reaches $1.4-bn settlement with US courts on inflated mortgage ratings

Global credit rating agency Standard & Poor's Financial Services LLC (S&P) and its parent McGraw Hill Financial Inc have reached a settlement with US courts to pay $1.375 billion for S&P's inflated ratings on certain risky US mortgage securities and debt issued prior to the onset of the global financial crisis.

The inaccurate ratings issued from 2004 through 2007 were claimed to have helped to spark off the deepest financial crisis since the Great Depression.

The settlement resolves the proceedings with the US Department of Justice (DoJ), attorney generals of 19 states and district of Columbia.

Under the terms of the deal, S&P will pay $687.5 million to the DoJ and $687.5 million to the states and district of Columbia.

In addition, a separate $125-million settlement has also been reached with the California public employees' retirement system (CalPERS) to resolve its claims against the company on its ratings on three investment vehicles.

DoJ filed the civil charges on S&P's wrongdoings in February 2013 and other lawsuits followed after that.

The move was part of the US government's efforts to hold some of the market players accountable for the one of the worst crises that drove the global economy into a deep recession.

The ''big three'' rating agencies, S&P, Moody's Investors Service and Fitch Ratings were accused of fueling the sub-prime mortgage crisis by giving high ratings to high-risk securities which enabled banks to sell trillions of dollars worth of toxic mortgages.

The DoJ charged S&P for failing to warn investors about the looming collapse of the US housing market in 2006 for fear of hurting its rating business.

The conclusion has been reached after months-long negotiations between the company and the prosecutors.

''The settlement contains no findings of violations of law by the company, S&P Financial Services or S&P Ratings,'' McGraw Hill said in a statement.

According to the settlement agreement, all the parties settled the matter ''to avoid the delay, uncertainty, inconvenience, and expense of further litigation."

In a news conference yesterday Attorney General Eric Holder said, "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.''

S&P had called the legal action ''meritless'' and the claims ''simply not true'' and insisted that the company followed a good-faith assessment of the mortgage securities.

''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.

S&P also agreed to withdraw its earlier allegation that the DoJ's action was in retaliation for its downgrade of the US debt in 2011.

The hefty penalty of $1.4 billion is more than 60 per cent of S&P's 2013 revenue of $2.27 billion and three times more that what the company offered initially, but falls far short of the $3.2 billion the government demanded.

The settlements will be reflected in S&P's fourth quarter and full-year 2014 financial statements to be released on 12 February 2015.

In another deal last month, S&P made an $80-million settlement with the federal government, New York state and Massachusetts on Securities and Exchange Commission's charges related to its ratings of high-risk mortgages after the crisis.

Now that the S&P case is settled, the authorities are turning their focus on similar actions conducted by Moody's.

''Our office intends to pursue the Moody's case now that the S&P case is resolved,'' a spokesman for George Jepsen, Connecticut's attorney-general told the Financial Times.

''As we have proven time and again, we will not be deterred or outlasted. No unlawful conduct is too complicated to pursue. And no financial institution, at home or abroad, is too powerful to be held accountable for wrongdoing,'' Holder stressed.