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Wednesday, February 6, 2013


LOS ANGELES, United States, Tuesday February 5, 2013 – The United States Department of Justice has filed a civil fraud lawsuit against one of the world’s larger credit-ratings agencies that services several Caribbean Community (CARICOM) member states.

On Monday, the department said it filed the suit in a US federal district court in which it accused the Wall Street-based Standard & Poor’s (S&P) of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis began.

Over the years, S&P, as well as other Wall Street-based credit rating firms, such as Moody’s and Finch, has rated the economies of most CARICOM countries, such as Jamaica, Trinidad and Tobago, Barbados, the Bahamas, Belize and Suriname.

In Monday’s suit, the US accused S&P and its parent company, McGraw-Hill Companies, of “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities from September 2004 to October 2007.

The suit also charges that S&P falsely stated that its ratings “were objective, independent, uninfluenced by any conflicts of interest.”

The US Justice Department said the suit against S&P focuses on about 40 collateralized debt obligations (CDO), an exotic type of security made up of bundles of mortgage bonds, which comprised individual home loans.

“As S&P knew, contrary to its representations to the public, S&P’s desire for increased revenue and market share in the RMBS (residential mortgage-backed securities) and CDO ratings markets, and its resulting desire to maintain and enhance its relationships with issuers that drove its ratings business, improperly influenced S&P to downplay and disregard the true extent of the credit risks,” the suit claims.

The Justice Department said the securities were created at the height of the housing boom, and that S& P was paid fees to the tune of US$13 million for rating them.

US prosecutors said they have unearthed a multiplicity of e-mails written by S&P employees, expressing deep concern about the way in which such securities were rated.

In response to the lawsuit, S&P said in a statement that the Justice Department “would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.”

The rating agency said it had started “stress-testing” the mortgage-backed securities it rated as early as 2005, in figuring out how they would perform in a severe market downturn.

Two years ago, a US Senate probe found that S&P and Moody’s, from 2004 to 2007, used “inaccurate rating models” that failed to predict how high-risk mortgages would perform.

The investigation also found that the rating agencies allowed competitive pressures to affect their ratings, and failed to reassess past ratings after improving their models in 2006.

Even against this background, S&P said on Monday that the US Department of Justice’s lawsuit was “entirely without factual or legal merit.”

The lawsuit came after S& P and the Justice Department failed to reach an agreement on a civil penalty to the tune of US$1 billion for S&P’s alleged wrongdoing. (CMC)


1 comment:

  1. These facts have been known since many years to market insiders/investors playing both sides of the derivatives market...
    Hallelu Jah! The truth is always revealed (however slow).