Justice Dept. Sues S&P Over Ratings
The U.S. Justice Department has sued McGraw-Hill Cos. and its S&P unit, accusing it of deliberately understating the risk of bonds backed by mortgages made to the riskiest borrowers to win business from Wall Street banks. The suit raises pressure to accelerate competition in the ratings industry -- while the government itself has adopted rules that left the business dominated by the same companies whose flawed grades sparked the worst financial crisis since the Great Depression.
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Standard & Poor’s slapped its best possible grade on 84 percent of a $500 million collateralized debt obligation named for a thorn tree, 98 percent of which was subprime residential mortgage-backed securities. The sting came a year later.
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When the U.S. Justice Department charged Standard & Poor’s with fraud earlier this month and demanded $5 billion in restitution, it was the culmination of the Obama administration’s four-year pursuit of financial chicanery masquerading as sacrosanct credit ratings.
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A $1.6 billion collateralized debt obligation issued by Vertical Capital LLC in March 2007 with the same name as a portion of the beach at St. Tropez, France, burned out just 228 days after it was issued.
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McGraw-Hill Cos., accused by the U.S. of misleading investors about the risks of subprime mortgage bonds that helped ignite the credit crisis, reported a loss of $216 million in the fourth quarter as it took a charge on the pending sale of its education business.
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When Charles O. Prince III was chief executive officer of Citigroup Inc. from 2003 to 2007, he didn’t know about a surge in mortgage risk that his own investment bankers loaded on to its bank’s books.
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John Keker’s San Francisco law firm declares on its website that it takes the “the make or break cases where companies, careers and reputations are riding on the result.”
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A Standard & Poor’s analyst in 2004 sent an e-mail to executives at the rating company’s structured- finance group. It had lost a job to Moody’s rating a mortgage- backed security because S&P criteria were more demanding, and something had to be done, the analyst allegedly wrote.
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Global investment banks based in Europe and the U.S., facing regulatory and cost-cutting pressures at home, are losing market share in emerging economies to smaller domestic competitors.
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A unit of New York Life Insurance Co. issued a $1.5 billion collateralized debt obligation named after a Northern sky constellation in April 2007. The deal burst when it defaulted less than a year later.
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