The U.S. vs. Standard & Poor's
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.
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.
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.
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.
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.
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.
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.
Emerging-market stocks rose toward a four-month high as European and U.S. futures signaled a rebound after the Standard & Poor’s 500 Index erased this year’s advance. The yen gained versus the dollar while nickel headed for its longest rally since 2010 on supply concerns.
Capstone Investment Advisors LLC’s Paul Britton, whose volatility hedge-fund firm oversees $2.5 billion, predicts that within five years his small sector of the industry will produce a pool whose size rivals some of the biggest managers today.
U.S. stocks fell, pushing the Nasdaq 100 Index to its biggest three-day retreat since 2011 and erasing the year’s gains in the Standard & Poor’s 500 Index, as technology shares extended last week’s selloff.
The euro gained against 12 of its 16 major counterparts as European Central Bank policy makers signaled deflation risks are contained, subduing speculation of a round of bond-buying to boost prices and economic growth.
Brazil’s real rose to a five-month high as President Dilma Rousseff’s decline in another poll added to speculation that she will struggle to win re-election after consecutive years of stalling economic growth.