S&P to pay $1.5 bn to resolve financial crisis lawsuits

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Standard and Poor's, whose headquarters are pictured in New York on September 18, 2012, downgrades Greece's credit rating to B-, just one notch above the range indicating vulnerability to a default

Standard and Poor's, whose headquarters are pictured in New York on September 18, 2012, downgrades Greece's credit rating to B-, just one notch above the range indicating vulnerability to a default (AFP Photo/Emmanuel Dunand)

New York (AFP) - Standard & Poor's, the world's leading credit rating agency, will pay $1.5 billion to settle US allegations of inflated ratings linked to the financial crisis that unleashed the Great Recession.

The settlement agreements announced Tuesday resolve civil lawsuits filed by the US Justice Department, 19 states, the US capital and the nation's largest pension fund.

S&P, a unit of McGraw Hill Financial, will pay $1.375 billion to resolve lawsuits accusing it of bilking investors by hiding the true risks of mortgage bonds linked to the financial crisis, the Justice Department.

Half will go to the Justice Department and the other half to the 19 states and Washington, DC.

Separately, S&P will pay $125 million to California state pension fund CalPERS to settle allegations of fraud that led to its investment losses.

The Justice Department and the states sued S&P two years ago for giving undeservedly rosy ratings to bonds that were backed by subprime mortgages, risky home loans that defaulted in droves as the housing price bubble collapsed.

The subprime crisis was at the center of the US financial meltdown that led to the 2008-2009 Great Recession.

According to the Justice Department suit, S&P's alleged fraud occurred from at least 2004 until 2007 and ultimately caused investors, including many financial institutions backed by the federal government, to lose billions of dollars.

S&P had claimed that its ratings were independent and not affected by its relationship with the companies hiring it to rate their securities.

But in a statement of facts as part of the settlement, S&P admitted that company executives had complained internally that it was not downgrading already-soured bonds because it was worried about losing some ratings business.

"The company's leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised," said US Attorney General Eric Holder.

"While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression."

- Retaliation claim dropped -

S&P acknowledged its fraudulent conduct with the ratings of the structured financial products, but it said it had not admitted to any legal violations.

"The settlement agreement states that all parties, including the company, the DOJ and the states, settled this matter 'to avoid the delay, uncertainty, inconvenience, and expense of further litigation,'" the company said.

It said agreeing to the payments was "in the best interests of the company and its shareholders."

S&P also agreed to formally retract an allegation that the US government sued the company in retaliation for its decision to strip the United States of its coveted AAA sovereign debt credit rating in 2011.

In January, S&P agreed to pay $77 million to settle allegations from three US regulators, including the Securities and Exchange Commission, that it had overvalued 2011 mortgage bonds.

As part of that agreement, S&P was stripped of its authority to rate certain bond deals for one year.

CalPERS said that the $125 million settlement addresses losses on three S&P-rated structured investment vehicles that collapsed during the financial crisis.

CalPERS still has similar charges outstanding against S&P rival Moody's Investors Service.

Moody's is also under investigation for allegedly overvaluing bonds between 2007 and 2007 in the ongoing Justice Department probe of crisis-era failings, according to the Wall Street Journal.

Justice authorities and Moody's executives have been holding talks in recent months on the matter, the newspaper reported.