WASHINGTON -- Standard & Poor's Corp. helped cause the financial crisis by misleading investors with falsely high credit ratings on bonds backed by toxic subprime mortgages, federal officials alleged Tuesday in announcing a civil suit against the company.
S&P executives were motivated by a desire to increase the company's profits and delayed downgrading its AAA ratings on the mortgage-backed securities because it did not want to lose business from banks trying to package bad loans for sale to investors to get them off their books, Justice Department officials said.
"Centuries ago, medieval alchemists tried various methods to turn lead into gold," said Tony West, acting associate attorney general, noting the code name for the three-year investigation was "Alchemy."
Justice Department complaint against S&P
"Here we allege that S&P's desire to ensure market share, to ensure profit, to ensure revenue led it on a misguided venture to take securities it knew were lead and to tell the world, through its ratings, that they were gold," West said at a Washington news conference.
"And in so doing, we believe that S&P played a significant role in helping to bring our economy to the brink of collapse," he said.
In addition to the federal suit, California and several other states filed their own suits against S&P on Tuesday on top of some existing state suits. The actions mean that 16 states and the District of Columbia will have suits against S&P.
"Ignoring obvious risks and flaws in the methods used to evaluate risk, S&P gave premium ratings to risky investments, including investments backed by toxic mortgages," said California Atty. Gen. Kamala Harris, one of six state attorneys general who attended the news conference.
"Today, we insist that S&P accept responsibility for its role in the crisis and for its conduct," she said. California's suit seeks $4 billion in compensation and damages from S&P for losses on investments by state pension funds.
Atty. Gen. Eric Holder said S&P's ratings led to at least $5 billion in losses by federally insured financial institutions. The Justice Department suit seeks to recover that money under the Financial Institutions Reform, Recovery and Enforcement Act.
"Put simply, this alleged conduct is egregious, and it goes to the very heart of the recent financial crisis," Holder said.
West said the AAA ratings on residential mortgage-backed securities and collateralized debt obligations, another type of security backed by home loans, were crucial to investors purchasing them.
Even though S&P earned millions of dollars in fees for rating the investments, the company promised its assessments were objective and independent. But West said they were not.
"We allege that from at least 2004 to 2007, S&P lied about its objectivity and independence. They said one thing, yet they did another," West said.
The company "would regularly tweak or bend, delay updating or otherwise adjust its ratings models to suit the company's business needs," he said.
S&P has denied the allegations.
"Claims that we deliberately kept ratings high when we knew they should be lower are simply not true," the company said Tuesday. "Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected."
S&P has said its ratings are protected by the 1st Amendment because they were simply the company's opinion of the credit-worthiness of investments. Mississippi Atty. Gen. James Hood called the defense "laughable."
"You can make a representation, but it's got to be true, or otherwise, it's in violation of states' consumer protection laws," Hood said.
West also dismissed the 1st Amendment argument.
"It does not protect saying one thing and doing another," he said. "It does not protect issuing ratings that you know are inflated at the time you issued them. And those are the two basic allegations in this lawsuit."
West and Holder also denied the suit was retribution for S&P downgrading the U.S. credit rating in 2011. S&P was the only one of the three major credit rating companies to issue a downgrade after a divisive battle in Washington over raising the nation's debt limit.
Holder said "there's no connection between the two." And West said the investigation into S&P's conduct began in 2009, long before the downgrade.
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