No criminal charges against S&P.
More coming in a follow-up story, but evidence has surfaced today that this was an act of prosecutorial revenge against S&P for their high-profile downgrade of the U.S. AAA rating in 2011.
Much more below.
The government has filed a $5 billion civil complaint against Standard & Poor's. The 119-page lawsuit, filed late Monday in federal court in Los Angeles, is the first from the government against a ratings agency, a sector that has generally shielded itself from liability by citing First Amendment protection of free speech.
No individuals were charged in the DOJ's lawsuit, and it was not immediately clear why the government focused on S&P instead of rivals Moody's Corp or Fimalac SA's Fitch Ratings, which were also major raters of such securities.
A source close to S&P said the firm expected a years-long battle with the government over the lawsuit. Settlement talks recently collapsed, the source said, after the government sought a penalty of over $1 billion and admissions of wrongdoing, which would exposed the firm to outside liability.
"There was no fraud," S&P lawyer Floyd Abrams said on CNBC Tuesday morning. "The ratings that were issued were believed by the people who issued them. And that's what the government has got to disprove."
Between September 2004 and October 2007, as stress in the housing market was starting to emerge, S&P delayed updates to its ratings criteria and analytical models, which weakened its criteria beyond what analysts believed was needed to make them more accurate, the Justice Department said.
During that period, according to the complaint, S&P issued credit ratings on $2.8 trillion worth of mortgage securities and some $1.2 trillion in related structured products. It charged up to $750,000 per deal it rated, which meant that S&P viewed the investment banks that issued the securities as its main customers, according to the complaint.
In August 2004, the head of S&P's commercial mortgage-backed securities sent an email to her colleagues and said they planned to meet to discuss adjusting criteria "because of the ongoing threat of losing deals. We just lost a huge Mizuho RMBS deal to Moody's due to a huge difference in the required credit support level ... our support level was at least 10% higher than Moody's," the complaint said.
Highlight (1 minute):
Eric Holder announces S&P lawsuit.
"By knowingly issuing inflated credit ratings for CDOs - which misrepresented their creditworthiness and understated their risks - S&P misled investors, including many federally insured financial institutions, causing them to lose billions of dollars. In addition, we allege that S&P falsely claimed that its ratings were independent, objective, and not influenced by the company's relationship with the issuers who hired S&P to rate the securities in question - when, in reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire to increase its profits and market share to favor the interests of issuers over investors."
Complete press conference:
Photo by William Banzai7...