S&P’s allegedly fraudulent ratings
Illinois Attorney General Lisa Madigan has filed a lawsuit against Standard & Poor’s (S&P), alleging fraudulent role in assigning its highest ratings to risky mortgage-backed investments on behalf of its clients and investors in the years leading up to the housing market crash.
The State is alleging that S&P “compromised its independence as a ratings agency by doling out high ratings to unworthy, risky investments as a corporate strategy to increase its revenue and market share,” the AG said in a statement.
Court documents show further allegations that S&P ignored the increasing risks posed by mortgage-backed securities, instead giving the investment pools ratings that were favorable to its investment bank client base and S&P’s profits.
Internal messages show awareness of fraud
“Publically, S&P took every opportunity to proclaim their analyses and ratings as independent, objective and free from its desire for revenue,” Madigan said. “Yet privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue. The mortgage-backed securities that helped our market soar – and ultimately crash – could not have been purchased by most investors without S&P’s seal of approval.”
Internal emails are cited in the lawsuit among S&P employees that Madigan says illustrate that the company misrepresented its ratings as objective and independent, for example in April 2007, an internal instant messenger application message shows employees discussing the ratings versus the reality of risk involved, with one message stating that an investment “could be structured by cows and we would rate it.”
Investors relied on S&P ratings for their objectivity, but court documents cite congressional testimony by a former managing director of S&P who revealed that “profits were running the show,” with ratings being assigned to risky investments to help drive profit margins for their clients.