The US Justice Department and several states have sued Standard & Poor's and its parent McGraw-Hill alleging that S&P exaggerated its ratings on mortgage bonds before the financial crisis, leading to massive losses by banks and others which invested in them.
Here are the main allegations of the suit:
-- S&P built up a huge business of rating collateralized debt obligations and residential mortgage-backed securities, which were rolled into the CDOs. Earning up to $750,000 for each rating, S&P brought in some $900 million on the business in 2006 and 2007.
-- With issuers favoring whoever would give a better grade to their securities, S&P softened its CDO and RMBS ratings to keep ahead of rival Moody's. It even stalled upgrading its own ratings models and criteria so that it would not have to toughen its ratings.
-- Banks and other financial institutions invested in the securities based on S&P's top-grade AAA rating, expecting that it meant the CDOs were very low-risk. They lost billions due to that confidence in S&P's ratings.
-- In early 2007 S&P gave AAA ratings to dozens of CDO issues. Within one year, and sometimes within six months, nearly all were in default, investors losing most or all their money. For example, almost all the tranches of the $1.5 billion Pinnacle Peal I CDO earned a AAA rating on July 3. By January 17, 2008, the CDO was in default, and a key investor, Citigroup, lost its money.
-- Even so, from late 2006 and through 2007 S&P executives and analysts knew the US housing market, and thus the millions of mortgages that comprised the RMBS and CDOs, were in deep trouble and that the risks for the CDOs it rated had risen sharply. On December 11, 2006, a S&P executive wrote: "This market is a wildly spinning top which is going to end badly."