DOJ Plans To Sue S&P Over Its Ratings Of Mortgage-Backed Securities

Audie Cornish talks with Jim Zarroli about the news that Justice Department is planning to sue Standard & Poor's over its ratings of certain mortgage-backed securities back in 2007. S&P said such a suit would be without factual or legal merit.

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ROBERT SIEGEL, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

AUDIE CORNISH, HOST:

And I'm Audie Cornish.

Ever since the financial crisis erupted in 2008, fingers have been pointing at ratings agencies. Well, today comes news that the U.S. government plans to sue the largest agency, Standard & Poor's for fraud. The case has to do with how the S&P rated mortgage-backed securities. To explain, we're joined by NPR's Jim Zarroli. Hey there, Jim.

JIM ZARROLI, BYLINE: Hi.

CORNISH: So to start, what have you learned about the lawsuit so far?

ZARROLI: Well, we don't know a lot about the suit itself. It hasn't been confirmed by the Justice Department. It was confirmed by Standard & Poor's this afternoon. They said they have been told they're going to be sued. This has to do with the allegation that has been leveled against all of the rating agencies for several years now.

These agencies essentially were in the business of rating those sophisticated mortgage-backed securities that were issued by investment banks and other parties. In essence, these were pools of mortgages that were collected and repackaged into bonds and then sold on the open market. And the complain has been that a lot of the underlying mortgages were a lot riskier than Standard & Poor's represented them as. And so, a lot of people who bought them lost money.

The Financial Crisis Inquiry Commission actually said the agencies were key enablers of the financial meltdown. And, by the way, the S&P isn't the only rating agency that has been accused of this. Some of the same complaints have been launched against Moody's and Fitch. It's not clear why they're not being named here and S&P is.

CORNISH: But help us understand. Is the government contending that Standard & Poor's deliberately misrepresented the condition of these assets?

ZARROLI: It isn't really clear. I mean, this will be a civil suit and not a criminal suit. So, for the Justice Department, the burden of proof is going to be lower than it would be. I think they're surely going to argue that S&P didn't do its job. One of the main complaints against the rating agencies for a long time is that they have a basic conflict of interest in their business model.

They are paid by the very same people whose assets they're rating. So the criticism has always been that, you know, they have an incentive to sort of soft pedal any risks that they find. S&P, of course, which is a unit of McGraw-Hill, denies this.

They said today in a statement that, you know, essentially, yes, maybe we missed some of what was going on, but so did everybody else, including the government. Nobody saw the mortgage bust coming. Nobody really understood the risks out there. And the company said a suit would be entirely without factual or legal merit.

CORNISH: Now, these criticisms have been floating around for a long time. Why is this suit coming up now?

ZARROLI: Well, the Justice Department and the SEC have been investigating this for a long time and they're not the only ones. The state of Illinois filed suit against S&P last year. New York attorney general is conducting his own investigation. Until recently, the Justice Department was said to be in talks with S&P to reach a settlement.

The New York Times reported this afternoon that the talks broke down because the Justice Department simply wanted too much money. They were asking for at least $8 billion, which would have more than wiped out McGraw-Hill's profits for the entire year. So, apparently, the government is now planning to file suit. And, by the way, this is the first suit by the government, by the federal government against any of the rating agencies for their conduct in the months leading up to the subprime crisis.

CORNISH: NPR's Jim Zarroli, telling us about a lawsuit the federal government plans to file against the Standard & Poor's credit rating agency. Jim, thank you.

ZARROLI: You're welcome.

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