Justice: S&P defrauded investors

February 05, 2013

Justice: S&P defrauded investors

The Justice Department late Monday filed a civil suit against Standard & Poor's, alleging the firm knowingly inflated the ratings it issued on mortgage-backed instruments,including the typethat played a key role in the downfall of Western Corporate FCU, U.S. Central Corporate FCU and other financial institutions.

The suit is being brought under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which allows Justice to seek civil penalties equal to losses suffered by federally insured financial institutions. Others have been filed or are expected to be filed by several states and Washington, D.C., report said.

In the suit, filed specifically against S&P Financial Services and holding company McGraw Hill, Justice alleges the entities were involved in a scheme to defraud investors in residential mortgage-backed securities and collateralized debt obligations.

The Justice Department said S&P issued ratings on "trillions" of dollars' worth of RMBS and CDOs between 2004 and 2007, and it said it has already identified more than $5 billion in losses resulting from CDOs that were rated by S&P between March and October 2007. It said nearly every mortgage-backed CDO rated by S&P in this period failed.

So far, federally insured credit unions have paid an aggregate $4.1 billion to the Temporary Corporate Credit Union Stabilization Fund to pay the costs of the failures of WesCorp, U.S. Central and other corporates that had lots of RMBS and CDOs in their portfolios at the time of the housing downturn.

NCUA currently estimates future assessments in the range of $1.9 billion to $4.8 billion. NAFCU has urged NCUA to take whatever measures are available to it to mitigate costs for insured credit unions.

S&P was the only credit rating agency to downgrade U.S. Treasuries (from AAA to AA+) following the debt-ceiling stalemate in August 2011. It was the first rating agency to ever do so.

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