Attorney General Eric Holder speaks to the press about the settlement with S&P 500.
WASHINGTON — Standard & Poor’s 500 index agreed to pay nearly $1.38 billion in a settlement related to the rating service’s involvement in the 2008 financial crisis, Attorney General Eric Holder announced Tuesday.
The Justice Department in 2009 began investigating S&P 500, owned by McGraw Hill Financial Inc., for allegedly falsifying its credit ratings.
The company admitted inflating its assessments of Residential Mortgage-Backed Securities, or RMBS, and also Collateralized Debt Obligations, called CDOS, during the housing crisis. As a consequence, investors were buying into bundled mortgages without knowing the high risk of their investments. Homeowners were not able to pay back their loans, which contributed to the financial crisis.
The Justice Department filed its civil lawsuit in 2013.
In the settlement, S&P 500 admitted it knew ratings should have been reduced, but the government said the company ignored this to increase its profits.
McGraw Hill said in a news release that, “the settlement contains no findings of violations of law by the Company, S&P Financial Services or S&P Ratings,” and emphasized that all involved in the case wanted “to avoid the delay, uncertainty, inconvenience, and expense of further litigation,” as the settlement states.
Despite reaching an agreement, Holder took a harsh tone towards S&P 500 in a news conference at the department.
“While this strategy may have helped S&P avoid disappointing clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression,” said Holder.
The payment amounted to more than S&P earned from the fraud — and is the largest penalty payment ever made by a rating agency. It will be split between the United States government and 19 states and the District of Columbia that also sued S&P 500.
California gets one of the largest payments, $176 million, from the DOJ’s suit, due to large amount of damages suffered by the California Public Employees’ Retirement System. CalPERs had invested in pension fund investments in the inflated Residential Mortgage-Backed Securities. In a separate lawsuit filed by CalPERs, S&P 500 will pay an additional $125 million.
“Today’s settlement is a victory for consumers – including pension plans and small businesses – who rightfully expected that securities ratings by Standard & Poor’s accurately reflected the safety of those investments,” said Sen. Richard Blumenthal, D-Conn., a former state attorney general involved in launching the suit.
During the news conference, Holder praised his department’s resilience despite the difficulties involved in the case.
In 2011, S&P 500 claimed that the DOJ filed its suit in response to the rating service removing the federal government’s top credit rating, an allegation that was revoked in the settlement. In addition, the DOJ’s resources were stretched as the department released 290 million documents in connection with the suit, more than any case in the agency’s history.
“This resolution provides further proof that the Department of Justice will vigorously pursue investigations and litigation, no matter how challenging, to protect the best interests of the American people,” said Associate Attorney General Stuart Delery.
