S&P Says U.S. Is Retaliating Over Downgrade
SANTA ANA, Calif. (CN) - The government's $5 billion lawsuit against Standard & Poor's is a "meritless" action filed in retaliation for downgrading the nation's credit rating to AA+ from AAA, the credit-rating agency claims in its defense.
In a legal response filed Tuesday, S&P denied allegations that it misled federally insured banks and credit unions by rubber-stamping toxic mortgage-backed securities with the agency's top investment grade.
The company suggests the government's action is politically motivated, and says the lawsuit violates its free speech rights, and is "meritless" and "unconstitutional."
In August 2011 S&P was the only one of the nation's three major credit-rating agencies to lower America's long-term rating to AA+ from AAA. It cited political gridlock over the raising of the debt ceiling as one reason for downgrade.
"Only S&P Ratings downgraded the United States and only S&P Ratings has been sued by the United States, even though the S&P ratings challenged by the United States were no different than those of at least one other rating agency," S&P says in the 72-page court filing.
The Department of Justice sued S&P in February, claiming its ratings led to the collapse of the housing market and the resulting financial meltdown that crippled the economy.
The credit-rating agency asked the court to throw out the lawsuit. But a federal judge in July ruled that the government can proceed with claims that S&P manipulated credit ratings of mortgage-backed collateralized debt obligations (CDOs) and residential mortgage-backed securities (RMBS) to increase its profits and cozy up to investment banks that pay its fees.
Now S&P claims its credit ratings "are not indicators of investment merit" and were "based upon a good faith assessment of, among other things, the performance of residential mortgages during a tumultuous time in the market."
"Like nearly every other market participant, analyst, and interested government entity, S&P ratings did not anticipate the full speed, severity, and breadth of the collapse of the housing market and its impact on the economy as whole," the rating agency claims in its filing. "S&P Ratings was not alone. Other rating agencies that have not been charged with fraud or misconduct by the United States issued ratings similar to and often identical with those of S&P ratings."
S&P suggests that the government should shoulder its share of the blame, noting that in 2007 Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson were looking at the same data as the ratings agencies but never sounded the alarm.
Instead, senior government officials were in lockstep with S&P's view that a crisis could be averted, the rating agency says.
"[W]hen Mr. Bernanke, looking back with several years of hindsight in December 2009 said, 'I did not anticipate a crisis of this magnitude and this severity,' that was also true of S&P ratings," S&P says in its defense.
It denies that it lowered standards when rating the mortgage-backed assets, claiming it actually "strengthened" its criteria for reviewing securities between March 2007 and October 2007.
S&P adds that the Justice Department is cherry-picking quotes from supporting documents, including internal S&P emails, that when taken out of context do not mirror their "true content."
The rating agency also insists that banks did not rely on its statements.
In the July 16 ruling, U.S. District Judge David Carter was not convinced by that line of reasoning.
"Regarding the question of materiality, S&P argued that, since the issuer banks had access to the same information and models that S&P analysts did, they could not have been fooled by faulty credit ratings," Carter wrote in his 18-page order. "This begs the question: if no investor believed in S&P's objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company's credit ratings service added absolutely zero material value as a predictor of creditworthiness?"
S&P is owned by McGraw-Hill Companies, a co-defendant in the February lawsuit alleging mail fraud, wire fraud and financial institution fraud.
They demand a jury trial and are represented by John Keker with Keker & Van Nest in San Francisco.