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http://www.cnn.com/2013/02/05/business/sp-lawsuit-department-of
S&P faces lawsuit over high credit ratings: Why now?
By Ramy Inocencio and Kevin Voigt, for CNN
updated 12:34 AM EST, Tue February 5, 2013
A sign for Standard & Poor's rating agency stands in front of the company
headquarters in New York, September 18, 2012.
STORY HIGHLIGHTS
U.S. government lawsuit against S&P would be first for a credit ratings
agency
S&P parent company, McGraw-Hill, plunged 13.78% in Monday trading
NYT: $1 billion settlement talks recently fell through between S&P, Justice
Dept.
S&P: Justice Department lawsuit 'without factual, legal merit'
Hong Kong (CNN) -- In a first for a U.S. credit ratings agency, Standard &
Poor's has received official notice from Washington that it will face a
civil lawsuit over imprecise ratings -- now criticized as being too high by
analysts, U.S. lawmakers and even S&P itself -- of mortgage-backed
investments that eventually contributed to the 2008 financial crisis.
Many of those investments received AAA ratings, a grade which implies
highest safety and least risk, but imploded as the U.S. housing bubble burst.
As S&P awaits further word from the U.S. Department of Justice, ratings
agencies Moody's and Fitch will be watching to see if they are next.
Standard & Poor's parent company, McGraw-Hill Companies, plunged 13.78% in
Monday trading, after investors learned of the Department of Justice's
intent to file suit. The company's share price fall was its biggest one-day
drop since the stock market crash of 1987.
French credit downgrade blame game
Markets overreacting to Moody's ratings?
S&P's Chambers explains euro downgrades
It is unclear as to why S&P is the first to be targeted but according to a
recent New York Times report, settlement talks between the ratings agency
and the Department of Justice fell through in the past two weeks. The
article also reported that prosecutors demanded S&P pay a $1 billion penalty
and admit to wrongdoing.
In a statement, S&P has said the expected Department of Justice is "entirely
without factual or legal merit."
Who are the credit rating agencies?
The "big three" are Standard & Poor's, Moody's Investor Services and Fitch
Ratings. All originated in the United States, although Fitch has
headquarters in New York and London.
What do they do?
Before you can get a credit card, banks run a credit check on you. Similarly
, the ratings agencies run credit checks on companies, countries and
financial products -- and banks themselves.
The agencies assess their ability to pay off loans or investments and then
rate them on a sliding scale, ranging from AAA to D. In the case of
government bonds, anything that slips to BB+, as was the case with crisis-
hit Greece, is considered a "highly speculative" investment, or "junk bonds"
in the parlance of the markets.
Why do the agencies wield such power?
Investors across the world look to credit ratings agencies to judge where to
place their bets in the market. For governments, the ratings agencies have
a lot of power over the popularity of bonds: cash given to governments like
Greece by investors that, over time, will pay a return on the original
investment -- unless the government defaults.
The downgrade of Greece signaled Standard & Poor's belief that Greece has a
higher likelihood to default on investments. It caused investors to lose
their appetite to invest in bonds from Greece, which then imperiled the
nation's ability to pay down its deficit.
How are ratings agencies paid?
Historically, they were created to give investors an unbiased assessment of
investments and investors paid for access to the ratings. In the 1970s,
however, credit rating agencies started charging the issuers of new
investments fees for ratings. In 1975, U.S. legislators -- fearing a
proliferation of unscrupulous ratings agencies -- designated Standard & Poor
's, Moody's and Fitch as the only ratings organizations banks and brokers
could use to evaluate the credit worthiness of their products.
Since 2011 however, European regulators have begun to push back against U.S.
ratings agencies, blaming them for adding volatility to the sovereign debt
crisis by lowering their ratings of troubled eurozone nations -- thereby
pushing up borrowing costs.
What are the complaints against the firms?
Critics complain the agencies have lost their ability to independently judge
the risk on certain investments -- especially in light of AAA ratings given
to mortgage-backed securities that imploded when defaults on U.S. home
loans shot up, triggering the 2008 financial crisis. Critics also note that
the agencies are paid by the very entities they rate, raising questions
about their trustworthiness.
Lawmakers in the United States, the European Union and other countries
around the world are now reviewing regulations on the credit ratings
agencies. Credit ratings agencies, too, have revamped their procedures and
have argued their ratings are merely opinions -- it's up to the markets to
decide.
http://www.thehawkeye.com/story/BC-US--Standard---Poor-s-Lawsui
SP expects US lawsuit over its mortgage ratings
By DANIEL WAGNER
and MARCY GORDON
Associated Press
WASHINGTON - The U.S. government is expected to file civil charges against
Standard & Poor's Ratings Services, alleging it improperly ga ... |
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