5 February 2013
Last updated at 17:39 GMT
Significant harm was caused by S&P's alleged conduct
The
US Justice Department has confirmed it will sue Standard and Poor's
over a "scheme to defraud investors" before the financial crisis.
Attorney General Eric Holder announced that the Department
has filed a civil lawsuit against the firm over the way it rated
mortgage bonds.
"This alleged conduct is egregious and it goes to the very heart of the recent financial crisis," he said.
S&P said the case is entirely without factual or legal merit.
The suit would be the first such case over alleged wrongdoing by a ratings agency tied to the financial crisis.
On Monday, S&P announced that it expected to receive a lawsuit from the Justice Department.
Shares in S&P's owner, the US publishing and media group
McGraw Hill, fell 14% on Wall Street on Monday following the
announcement, and more than 5% during early trading on Tuesday after the
Justice Department unveiled details of its action.
Shares in fellow ratings agency Moody's fell 10% on Monday and more than 2% on Tuesday.
'Key enablers in the meltdown'
S&P and other agencies have faced criticism from
investors, politicians and regulators for assigning their top AAA
ratings to thousands of subprime and other mortgage securities that
later collapsed in value.
Such agencies are paid by the issuers of bonds and other
securities for ratings, raising concern about potential conflicts of
interest.
Grades assigned by these firms can affect a company's ability
to raise or borrow money as well as how much investors will pay for
their securities.
In the case of the subprime mortgage bubble, ratings agencies
including S&P were hired to assess collateralised debt obligations
(CDOs) - complex financial transactions that packaged together thousands
of loans to individual homebuyers.
Continue reading the main story
Collateralised debt obligations (CDOs)
A financial structure that groups
individual loans, bonds or other assets in a portfolio, which can then
be traded. In theory, CDOs attract a stronger credit rating than
individual assets due to the risk being more diversified. But as the
performance of many assets fell during the financial crisis, the value
of many CDOs was also reduced.
The ratings agencies' job was to assess
the likelihood that the home loans - and therefore the CDOs - would
ultimately be repaid. Their ratings enabled the investment banks which
put the CDOs together to then sell them to investors around the world.
In its January 2011 report,
the US Financial Crisis Inquiry Commission called the agencies "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown".
S&P said on Monday that it "deeply regrets" how its CDO
ratings failed to anticipate mortgage market conditions as the financial
crisis hit, and that it has since spent $400m to help bolster the
quality of its ratings.
"Every CDO that [the department] has cited to us also independently received the same rating from another rating agency.
"The Department of Justice would be wrong in contending that
S&P ratings were motivated by commercial considerations and not
issued in good faith."
US sues S&P over 'fraud' attempt
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