WASHINGTON — Standard & Poor’s Financial Services said Tuesday it has agreed to pay $1.38 billion to settle government charges that it inflated ratings of mortgage-backed securities and other assets during the housing boom, helping set off the financial crisis and recession.
Under the deal, the unit of McGraw Hill Financial will pay $687.5 million to the Justice Department, and an equal amount to 19 states and Washington, D.C. It’s the largest penalty ever recovered from a credit ratings agency.
From 2004 to 2007, S&P falsely claimed its ratings of mortgage securities and collateralized debt obligations — a type of derivative — were objective and independent, the government alleged. In reality, the ratings were “affected by significant conflicts of interest” — namely, S&P’s desire to boost revenue by rating the debt favorably to the banks selling them, the Justice Department said.
“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” Attorney General Eric Holder said at a news conference Tuesday.
“While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression,” Holder said.
The credit-rating agency’s agreement represents one of the government’s key efforts to hold accountable the market players deemed responsible for contributing to the worst financial crisis since the Great Depression. The settlement announced Tuesday came after months of negotiations.
But the settlement, which is subject to court approval, also includes no findings that the company violated the law — a clause that is already drawing critics.
“I think it is a classic example of a regulatory slap on the wrist,” said securities lawyer Andrew Stoltmann of the agreement that S&P not admit wrongdoing. “The fine was not punitive enough to deter this sort of conduct in the future,” Stoltmann said. S&P said it settled this matter “to avoid the delay, uncertainty, inconvenience and expense of further litigation.”
“After careful consideration, the company determines that entering into the settlement agreement is in the best interests of the company and its shareholders and is pleased to resolve these matters,” the company said.
S&P also reached a separate settlement to pay $125 million to the California Public Employees Retirement System to resolve its claims related to ratings of three structured investment vehicles. That deal is not subject to court approval.
The Justice Department filed civil fraud charges against S&P two years ago this week, accusing the company of failing to warn investors that the housing market was collapsing in 2006 because doing so would hurt its ratings business.
The Justice Department had demanded $5 billion in penalties from S&P when it sued the company in February 2013. The payment of about $1.38 billion to settle the case is less than S&P’s revenue in 2013 of $2.27 billion.
At the time, S&P accused the government of filing the lawsuit in “retaliation” for the rating agency’s infamous 2011 decision to strip the country of its “AAA” credit rating.
On Tuesday, Holder called the retaliation allegation “utter nonsense.”
Experts say the Justice Department’s lawsuit against S&P could serve as a template for action against Fitch and Moody’s, which together with S&P make up the nation’s three big rating agencies. All three agencies have been blamed for helping fuel the 2008 financial crisis by prettying up ratings of of often toxic mortgage securities in a frenzy to drum up business from the banks that were selling them to pension funds and other investors.
Those investments soured when the housing market started to decline in 2007.
S&P disputed the government’s allegations when the federal suit was filed, calling the legal action “meritless” and the claims “simply not true.” The company insisted its ratings were based on a good-faith assessment of the performance of home mortgages at the time.
Last month, S&P forked over more than $77 million to settle separate charges by the Securities and Exchange Commission, New York and Massachusetts over allegations of “misleading” ratings of commercial mortgage-backed securities in 2011 — more than three years after the housing crisis began.
The SEC and the states accused S&P of fraudulent misconduct, saying the company falsely advertised that it was adhering to stricter standards than it actually was tied to $1.5 billion in CMBS it rated in 2011.
S&P neither admitted nor denied the charges in the settlement, but was banned from rating new U.S. conduit-fusion CMBS transaction until Jan. 21, 2016. These are securities backed by pools of loans secured by commercial real estate, such as mortgages for shopping malls or skyscrapers.
Contributing: The Associated Press.