Justice Dept. Settles S&P Lawsuit

Feb 3, 2015
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DAVID GREENE, HOST:

This morning, one more step in the process of cleaning up after the 2008 financial crisis - the ratings company Standard and Poor's will pay $1.3 billion to settle allegations that have defrauded mortgage investors. The settlement resolves lawsuits filed by the Justice Department and by 19 states and the District of Columbia. They alleged that S and P gave positive ratings to mortgage bonds, even though they knew they were risky. NPR's Jim Zarroli joins me on the line from our New York bureau. Jim, good morning.

JIM ZARROLI, BYLINE: Hi, David.

GREENE: So explain this accusations a bit more, if you can.

ZARROLI: Well, the government says that S and P had evidence that a lot of the products it rated were risky and that they didn't tell investors. That's the nub of it, really. S and P is one of three major ratings companies. They rate all kinds of financial projects. They have a lot of influence and power in the market. They have a conflict of interest in that they are paid by the very same companies whose assets they rate.

Now, in the years leading up to the financial crisis, they rated a lot of mortgage-backed securities and collateralized debt obligations, or CDOs, that were very popular at the time. The government says S and P had been told by their own analysts that the products were risky, and they didn't want to downgrade them because they didn't want to risk losing business. Here was Attorney General Eric Holder this morning.

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ERIC HOLDER: Our suit alleged that from at least 2004 until 2007, S and P engaged in a scheme to defraud investors by knowingly issuing inflating credit ratings for CDOs that misrepresented their credit worthiness and understated their risks, ultimately causing investors, including many federally insured financial institutions, to lose billions - billions of dollars.

GREENE: Lots of money at stake, and this really is taking us back to one of the big causes of the financial crisis, it sounds like. So what has S and P actually agreed to under this settlement with the government in settling these lawsuits?

ZARROLI: Well, they've agreed to pay the fine, which will be divided up among the Justice Department and the states. It's the biggest fine ever levied against a rating agency. They also agreed to a statement of facts that the Justice Department says makes pretty clear they knew the securities they rated were risky, and they did - they sold them anyway. They rated them anyway.

GREENE: When you say statement of facts - I mean, has the company actually admitted it broke the law here?

ZARROLI: No, they have not admitted any - breaking any law. That's often been the case with these big financial settlements, and it's been very controversial. But they did agree to something else that was very important to the Obama administration. You might remember that S and P actually downgraded U.S. government debt in 2011 because of the deficit.

GREENE: Right.

ZARROLI: Made a lot of headlines at the time. Later, after this suit came out, S and P said the administration was retaliating against it for the downgrade. And this was echoed by a lot of critics, so it became very politicized. So as part of the settlement announced this morning, S and P is backing off that claim, saying there was no retaliation.

GREENE: All right. NPR's Jim Zarroli speaking to us from New York about Standard and Poor's settling - paying $1.3 billion to settle allegations that it defrauded mortgage investors. Jim, thanks a lot.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.