NEW YORK – The U.S. Justice Department plans to sue Standard & Poor’s over its rating of mortgage bonds prior to the 2008 financial crisis, S&P said Monday.
The suit, according to S&P, targets its 2007 ratings of certain collateralized debt obligations (CDOs), packages of mortgages sold to investors that were at the center of the the 2008 global financial crisis sparked by the U.S. housing collapse.
S&P promised a vigorous defense, saying the looming lawsuit will be “entirely without factual or legal merit.”
A Justice Department spokeswoman declined to comment, but media reports said the suit could be filed later this week.
The U.S. complaint, as described by S&P, appears to allege that S&P’s high ratings on CDOs played a major role in the crisis because of the confidence they engendered in investors.
However, S&P said that in 2007 and prior to that time it had downgraded a number of residential mortgage-backed securities included in the CDOs ahead of other ratings agencies.
“With 20-20 hindsight, these strong actions proved insufficient — but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith,” S&P said.
U.S. prosecutors have questioned former S&P analysts over whether the firm ignored its own standards when rating the securities because of fees from investment banks, according to a report in the Wall Street Journal.
Up until last week, the Department of Justice and S&P had held settlement talks. But the discussions ceased after Justice said it would seek at least $1 billion to settle the case, according to The New York Times, which cited people who were briefed on the government’s plans.
S&P contends that it was far from alone in its failure to predict the scale of the U.S. housing market’s collapse.
That crash wiped hundreds of billions of dollars in value from mortgage securities, pushing the government to intervene and rescue major banks that had invested in them.
Rather, S&P cited the congressional testimony of a former Securities and Exchange Commission chairman who said the SEC, the Federal Reserve and three other U.S. agencies themselves did not predict the market collapse.
“Regrettably, the breadth, depth and the effect of what ultimately occurred were greater than we — and virtually everyone else — predicted,” S&P said.
The S&P suit will be the first U.S. suit against a credit ratings agency. S&P, along with rival agencies Moody’s and Fitch, has come in for heavy criticism for failing to unearth the problems with certain collateralized debt obligations.