U.S. govt. to sue S&P by over mortgage bonds assessment

PanARMENIAN.Net - Standard & Poor's says it is to be sued by the U.S. government over the credit ratings agency's assessment of mortgage bonds before the financial crisis, BBC News reported.

The civil lawsuit would focus on S&P's high ratings in 2007 for some mortgage-backed securities that later collapsed in value, said the agency.

S&P says the case is entirely without factual or legal merit. The suit would be the first such case over alleged wrongdoing by a ratings agency tied to the financial crisis.

S&P said the justice department had informed them of the impending civil suit, although the federal agency declined to comment.

The move follows a breakdown in talks between the justice department and S&P. Several states are expected to join the suit.

S&P and other agencies have faced criticism from investors, politicians and regulators for assigning their top AAA ratings to thousands of subprime and other mortgage securities that later collapsed in value.

Such agencies are paid by the issuers of bonds and other securities for ratings, raising concern about potential conflicts of interest.

Grades assigned by these firms can affect a company's ability to raise or borrow money as well as how much investors will pay for their securities.

In the case of the subprime mortgage bubble, ratings agencies including S&P were hired to assess collateralized debt obligations (CDOs) - complex financial transactions that packaged together thousands of loans to individual homebuyers.

The ratings agencies' job was to assess the likelihood that the home loans - and therefore the CDOs - would ultimately be repaid. Their ratings enabled the investment banks which put the CDOs together to then sell them to investors around the world.

In its January 2011 report, the U.S. Financial Crisis Inquiry Commission called the agencies "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown".