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Madigan sues Standard & Poor’s for allegedly enabling financial meltdown
Online Staff Report
CHICAGO — Illinois Attorney General Lisa Madigan filed a lawsuit Jan. 25 against Standard & Poor’s for its allegedly fraudulent role in assigning its highest ratings to risky mortgage-backed investments in the years leading up to the housing market crash.
Madigan filed her lawsuit in Cook County Circuit Court, alleging that Standard & Poor’s (S&P) compromised its independence as a ratings agency by doling out high ratings to unworthy, risky investments as a corporate strategy to increase its revenue and market share.
The Attorney General’s lawsuit alleges S&P ignored the increasing risks posed by mortgage-backed securities, instead giving the investment pools ratings that were favorable to its investment bank client base and S&P’s profits.
“Publically, S&P took every opportunity to proclaim their analyses and ratings as independent, objective and free from its desire for revenue,” Madigan said. “Yet, privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue. The mortgage-backed securities that helped our market soar — and ultimately crash — could not have been purchased by most investors without S&P’s seal of approval.”
The Attorney General’s lawsuit cites numerous internal e-mails and conversations among S&P employees in the run up to the housing market’s crash that demonstrate the company misrepresented its ratings as objective and independent. In one such exchange, in April 2007, an online conversation via a company-based instant messenger application revealed employees discussing S&P ratings compared to the reality of risk involved, with an employee stating an investment “could be structured by cows and we would rate it.”
Madigan said investors relied on S&P ratings because they were historically rooted in the agency’s purported independence and objectivity. S&P’s internal code of conduct states its goal to “promote investor protection by safeguarding the integrity of the rating process.” But, the Attorney General’s lawsuit cites congressional testimony by a former managing director of S&P who revealed that “profits were running the show,” with ratings being assigned to risky investments to help drive profit margins for their clients.
S&P, a subsidiary of McGraw-Hill Companies, is one of the nation’s largest credit ratings agencies responsible for independently rating risk on behalf of clients and investors.
Madigan said in the run up to the financial crisis, S&P consistently misrepresented the risk of mortgage-backed securities, assigning these securities its highest seal of approval — or AAA rating. This misrepresentation spurred investors to purchase securities that were far riskier than their ratings revealed.
Mortgage-backed securities are financial products composed of a pool of mortgages that are bundled together and sold as a security. The assets are backed by residential mortgages, including subprime mortgages.
The performance of these investment products have significant, real-world implications for Illinois institutional investors, such as pension funds and 401(k) managers who make decisions about whether, and which, of these securities are appropriate investments. It was the misrepresentation of the true value of these risky mortgage pools that helped the housing market skyrocket and ultimately led to its collapse in 2008.
The lawsuit is part of Madigan’s continuing work to hold lenders accountable for their unlawful financial misconduct, and to provide relief and assistance to Illinois families struggling to save their homes.
Most recently, in December 2011, Madigan and the U.S. Department of Justice reached a $335 million settlement with Countrywide, a subsidiary of Bank of America, for discriminating against thousands of Illinois borrowers of color during the height of the subprime mortgage lending spree. The settlement will provide restitution to harmed Illinois borrowers and is the largest settlement of a fair lending lawsuit ever obtained by a state attorney general.
The Attorney General is litigating a similar lawsuit against Wells Fargo alleging widespread discrimination against African-American and Latino borrowers.
Madigan led an earlier lawsuit against Countrywide, which resulted in a nationwide $8.7 billion settlement in 2008 over the company’s predatory lending practices. The Attorney General also reached a $39.5 million settlement with Wells Fargo over the bank’s deceptive marketing of extremely risky loans called Pay Option ARMs, and in 2006, Madigan obtained more than $10 million in restitution for Illinois homeowners as part of a $325 billion multi-state settlement with Ameriquest over the former mortgage giant’s deceptive sales of predatory subprime mortgages.
Assistant Attorneys General Vaishali Rao and Vijay Raghavan are handling the case for Madigan’s Consumer Fraud Bureau.