When the housing market collapsed in 2007, the agencies acknowledged that mortgages issued during the bubble were far less safe than the ratings had indicated. They lowered the ratings on nearly $2 trillion worth, spreading panic that spiraled into a crisis.
In its statement Tuesday, S&P said its ratings “reflected our current best judgments” and noted that other rating agencies gave the same high ratings. It said the government also failed to predict the subprime mortgage crisis.
But the government contends in its lawsuit that S&P was more concerned with making money than issuing accurate ratings. It says the company delayed updating its ratings models, rushed through the ratings process and kept giving high ratings even after it knew the subprime market was flailing.
The complaint includes a trove of embarrassing emails and other evidence that S&P analysts saw the market’s problems early:
- In 2007, an analyst who was reviewing mortgage bundles forwarded a video of himself singing and dancing to a song written to the tune of “Burning Down the House”: “Going — all the way down, with/Subprime mortgages.” The video showed colleagues laughing at his performance.
- A PowerPoint presentation that year said being “business friendly” was a core component of S&P’s ratings model.
- In a 2004 document, executives said they would poll investors as part of the process for choosing a rating. One executive asked, “Does this mean we are to review our proposed criteria changes with investors, issuers and investment bankers? … (W)e NEVER poll them as to content or acceptability!” The executive’s concerns were ignored, the government said.
- Also that year, an analyst complained that S&P had lost a deal because its standards for a rating were stricter than Moody’s Corporation (NYSE:MCO) . “We need to address this now in preparation for the future deals,” the analyst wrote.
The lawsuit comes just 18 months after S&P cut its rating on long-term U.S. government debt by a notch. The downgrade followed a contentious debate between the White House and Congress over the raising of the government’s borrowing limit that was resolved at the last hour.
During the news conference, Holder was asked about a possible link between the lawsuit and the downgrade.
“There’s no connection,” Holder said, who added the Justice Department investigation began in 2009. He said that S&P lowered its rating on U.S. debt after “assessing the creditworthiness of this nation.”
West, the acting associate attorney general, said the documents “make clear that the company regularly would ‘tweak,’ ‘bend,’ delay updating or otherwise adjust its ratings models to suit the company’s business needs.” He said that in 2007, S&P issued ratings that it “knew were inflated at the time they issued them.”
S&P countered that the emails were “cherry picked,” that they were “taken out of context, are contradicted by other evidence, and do not reflect our culture, integrity or how we do business.”
It said the government left out important context. For example, one email that says deals “could be structured by cows” and then rated by S&P was unrelated to the types of mortgage investments at issue in the government’s suit, S&P said. It said the analyst’s concerns were addressed before a rating was issued.
