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WASHINGTON – The U.S. government accused Standard & Poor’s of inflating ratings on mortgage investments to boost its bottom line, taking aim at a key player in the run-up to the financial crisis.
In charges filed late Monday in Los Angeles federal court, the Justice Department said S&P gave high marks to mortgage-backed securities that later went sour, even though it knew they were risky. The government said S&P misrepresented the risks because it wanted more business from the banks.
The case is the government’s first major action against one of the credit rating agencies that stamped their seals of approval on Wall Street’s mortgage bundles. It marks a milestone for the Justice Department, which has been criticized for failing to make bigger cases against the companies involved in the crisis.
“Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis,” Attorney General Eric Holder told a news conference Tuesday. He called the case “an important step forward in our ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history.”
Rating agencies are widely blamed for contributing to the financial crisis that crested in 2008, causing the deepest recession since the Great Depression. They gave high ratings, indicating little risk for investors, to pools of mortgages and other debt assembled by big banks and hedge funds, giving even wary investors the confidence to buy them.
Some investors, including pension funds, can only buy investments that carry high ratings. In effect, rating agencies such as S&P greased the assembly line that allowed banks to push risky mortgages out the door.
When the housing market turned in 2007, the agencies acknowledged that mortgages issued during the bubble were far less safe than the ratings indicated. They lowered the ratings on nearly $2 trillion worth, spreading panic that spiraled into a crisis.
S&P, a unit of New York-based McGraw-Hill Cos., has denied wrongdoing. It says the government also failed to predict the subprime mortgage crisis.
