What do you do when Standard & Poor’s downgrades your credit from AAA to AA+? Sue them, of course,
The Justice Department today announced a lawsuit against the credit rating agency “in our ongoing efforts to protect the American people from financial fraud, to hold accountable those who violate our laws and abuse the public trust, and to seek justice for all whose lives were devastated by the recent economic crisis,” in the words of Attorney General Eric Holder.
The government alleges that S&P “engaged in a scheme to defraud investors in financial products known as Residential Mortgage-Backed Securities, or RMBS, and Collateralized Debt Obligations, or CDOs.”
“We allege that, 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,” Holder said at a press conference today. “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.”
Holder called the alleged conduct “egregious” and something that “goes to the very heart of the recent financial crisis.” The action was brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
“The action we announce today marks an important step forward in the administration’s ongoing efforts to investigate – and punish – the conduct that is believed to have contributed to the worst economic crisis in recent history,” Holder said. “And it’s just the latest example of the critical work that the President’s Financial Fraud Enforcement Task Force is making possible.”
S&P downgraded the U.S. credit rating in August 2011 to its historic low. Democrats tended to blame the agency afterward, while Republicans blamed the lack of President Obama’s economic leadership.
“The rating agencies were preeminent culprits and enablers in financial abuse and fraud that crippled employment and nearly destroyed our economy– a fact that led to my legal action against them nearly five years ago, and the DOJ’s lawsuit today,” said Sen. Richard Blumenthal (D-Conn.) today. “I hope this action will help vindicate victims of rating agency abuses. …The DOJ needs to be even more aggressive in holding S&P and others accountable.”
“The DOJ and some states have filed meritless civil lawsuits against S&P challenging some of our 2007 CDO ratings and the underlying RMBS models. Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims,” the agency said in a statement.