The Justice Department is suing credit rating agency Standard & Poor's for allegedly ignoring their own standards and rating mortgage investments much higher than they should have been in years leading up to the financial crisis.
Per the suit, filed by U.S. Attorney General Eric Holder, S&P "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P's analytical judgment, and represented S&P's true current opinion regarding the credit risks."
According to Dealbook, prosecutors "have uncovered troves of e-mails written by S.& P. employees" that indicate concern over how mortgage investments were being rated. The complaint reproduces an internal instant message written by an S&P employee in April 2007 that reads "We rate every deal. It could be structured by cows and we would rate it."
The charges filed by the Justice Department are civil, not criminal, which has become par for the course when it comes to lawsuits related to financial crisis offenses.
Less par for the course is the fact that the Justice Department is taking action against a credit rating agency and, shortly after news of the lawsuit broke, talk turned to whether the charges were likely to stick. One reader of ASR’s sister publication American Banker’s blog, BankThink tweeted it "will [be] tough [to] convict ratings agencies. They will argue their default probability opinion is protected free speech." But others noted that defense hasn't always worked in private litigation against these firms.
S&P's statement, issued shortly before the suit was announced, reads: "A DOJ lawsuit would be entirely without factual or legal merit. The DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith." No one seems to know yet if the Justice Department is looking into filing similar lawsuits against Moody's Investors Service or Fitch Ratings.