According to the U.S. complaint, S&P falsely represented to investors that its credit ratings were objective, independent and uninfluenced by any conflicts of interests.
The company bent rating models to suit its business needs to the extent that one CDO analyst commented that loosening the measure of default risk for a certain security in 2006 “resulted in a loophole in S&P’s rating model big enough to drive a Mack truck through,” the U.S. said.
Banks create collateralized debt obligations by bundling bonds or loans into securities of varying risk and return. They pay ratings companies for the grades, which investors may use to meet regulatory requirements.
“A DOJ lawsuit would be entirely without factual or legal merit,” S&P said in a statement yesterday before the case was filed. “It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market, including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.”
S&P, in its statement, cited court rulings that have dismissed challenges to the opinions of ratings firms. The company also said it planned to fight any lawsuits.
Catherine Mathis, a spokeswoman for S&P, had no immediate comment on the complaint after it was filed.
Analysts at New York-based S&P, Moody’s Investors Service and Fitch Ratings, majority-owned by Fimalac SA of Paris, were pressured to give their stamp of approval to complex investments in a “race to the bottom” to win lucrative business from Wall Street banks, the U.S. Senate Permanent Subcommittee on Investigations said in an April 2011 report.
The Justice Department cites e-mails from S&P employees discussing the need to modify ratings criteria to win business after the company’s grades were more conservative than competitors.