Standard & Poor's Says Civil Lawsuit Threatened By DOJ Is Without Legal Merit And Unjustified
NEW YORK, Feb. 4, 2013 /PRNewswire/ -- Standard & Poor's Rating Services ("S&P"), a subsidiary of The McGraw-Hill Companies, Inc. (NYSE: MHP) today disclosed that the Civil Division of the United States Department of Justice ("DOJ") has informed the Company that it intends to file a civil lawsuit against S&P focusing on its ratings in 2007 of certain U.S. collateralized debt obligations ("CDOs"):
"A DOJ lawsuit would be entirely without factual or legal merit. It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained – and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency. S&P deeply regrets that our CDO ratings failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time. However, we did take extensive rating actions in 2007 – ahead of other ratings agencies – on the residential mortgage-backed securities ("RMBS") which were included in these CDOs. As a result of these actions, more collateral or other protection was required to support AAA ratings on CDOs. With 20/20 hindsight, these strong actions proved insufficient – but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.
"Before 2007, and increasingly during 2007, S&P downgraded a record number of RMBS and repeatedly warned of deteriorating conditions in the housing market and potential additional downgrades to come, in many cases before our peers. For example:
- In 2006, S&P downgraded 400 RMBS ratings – more than in any prior year in history – mostly in the subprime sector.
- In February 2007, S&P was the first rating agency to take negative ratings actions against new transactions even though the pools underlying those transactions had at that time experienced no actual losses.
- Between February and July of 2007 alone, S&P took 637 negative actions on ratings (250 downgrades and 387 CreditWatch negative actions) on 2006 vintage subprime RMBS.
"S&P analysts worked diligently to keep up with an unprecedented, rapidly changing and increasingly volatile environment, while acting to ensure changes to their ratings reflected robust analysis and deliberation. In fact, throughout this time, S&P included in its analysis the possibility that a rise in mortgage delinquencies would result in bondholder losses and, as a result, required substantially more RMBS collateral as protection against such potential losses to support AAA CDO ratings. Regrettably, the breadth, depth, and effect of what ultimately occurred were greater than we – and virtually everyone else – predicted. As former SEC Chairman David S. Ruder testified before the U.S. House of Representatives:
'None of the primary market participants predicted the collapse. The risk management systems of most banks, investment banks, rating agencies, and credit default swap insurers did not predict the collapse. Regulators, including the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Department of the Treasury, the SEC, and the Commodities Futures Trading Commission did not predict the collapse.'"A number of court rulings have dismissed challenges made with 20/20 hindsight to a credit rating agency's opinions of creditworthiness. In an attempt to end run well-established legal precedent, the DOJ plans to use a questionable legal strategy by suing S&P under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – a statute enacted in 1989 to stabilize and reform the savings and loan industry. If DOJ does bring suit, we will vigorously defend our Company against such meritless litigation.
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