Attorney General Bob Cooper on Tuesday joined the Department of Justice and other state Attorneys General in filing enforcement actions against Standard and Poor’s and its parent company, McGraw-Hill, seeking accountability for alleged misconduct by the credit rating agency. The allegations involved structured finance securities backed by subprime mortgages that were at the heart of the nation’s financial crisis.
The federal and state complaints allege that despite S&P’s repeated statements emphasizing its independence and objectivity, S&P allowed its credit rating analysis to be influenced by its desire to earn lucrative fees from its investment bank clients. Investors and others in the marketplace relied on credit rating agencies like S&P for accurate ratings because the underlying data for these securities was not publicly available.
This alleged misconduct began as early as 2001, became particularly acute between 2004 and 2007, and continued as recently as 2011.
Structured finance securities backed by subprime mortgages were at the center of the financial crisis. These financial products, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.
“The complaint filed in state court today alleges that investors as well as others in the market were misled by Standard and Poor’s promises that its analysis was independent and objective. Unfortunately, as the complaint alleges, this was not the case, and ratings of mortgage backed securities and collateral debt obligations were influenced by the desire to continue earning lucrative fees,” Attorney General Cooper said.
Tennessee’s lawsuit seeks relief to stop S&P from making misrepresentations to the public; change the way the company does business; and civil penalties and disgorgement of ill-gotten profits.
The congressionally-appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis “could not have happened” without ratings agencies such as S&P.
The State’s Complaint may be found on the Attorney General’s website by going to www.tn.gov/attorneygeneral and clicking on “Filings of Interest.”