Should The McGraw-Hill Companies, Inc. (MHP) Investors Be Worried About the Lawsuit?

If the S&P is guilty of downplaying the financial crisis then so would other rating agencies such as Moody’s. Moody’s traded lower with McGraw-Hill following this news, but investors seem to be discounting the possibility of Moody’s connection if in fact this lawsuit materializes. This could be a bad situation for the ratings firm; it has just $4.6 billion in retained earnings but also has over $1.7 billion in debt. Therefore, the company does not have the leverage to weather the storm. When you really think about it, this lawsuit should be an industry-wide event for the rating space, not just one firm, if plausible. As this lawsuit progresses I am sure that the S&P will use this fact to their advantage, or perhaps the government will go after Moody’s as well. Either way, there is sure to be more to the story.

How Will it End?

According to an interview on CNBC with an attorney for S&P, the rating agency earned less than $20 million for its ratings during the housing crisis. He also made a very valid point in saying that the firm’s rating is nothing more than an opinion, one that is made from a systematic approach. Therefore, how can the government prove its case?

My belief is that the DOJ will never win this case, and that its only chance is to attack other rating agencies in the process, such as Moody’s. They simply cannot single out McGraw-Hill’s rating agency, and I am not just saying this because I work for the company, but rather the necessary proof is not present due to it being a system based on opinions. Also, during the time of the housing crisis there were analysts, economics, rating agencies, the Fed, etc. who were all trying to judge the complexity of the housing crisis. Seriously, you didn’t have to watch or read “Too Big to Fail” to know that the government dropped the ball during the housing crisis and completely misjudged its seriousness. Therefore, how can the DOJ target one firm among many? My belief is that they cannot and that McGraw-Hill is presenting a good opportunity due to this recent weakness, caused by the government’s game of revenge for the S&P’s downgrade in 2011.

The article Should McGraw-Hill Investors Be Worried About the Lawsuit? originally appeared on Fool.com and is written by Brian Nichols.

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