A little more than six years after the start of the financial crisis, the rating agencies are being overtaken by the justice systems. Standard & Poor’s (S & P) have thus been penalized, by the Securities and Exchange Commission (SEC), the supervisory authority of the financial markets and the American justice. The subsidiary of the McGraw Hill group is accused of laxity on its rating criteria for bonds backed by mortgages, the famous “subprime” in order to increase its market share in this area.
S & P has signed an agreement with the US, which includes the payment of $77 million penalty and more uniquely, a ban noting the debt on commercial real estate in the United States for a period of one year. This is the first sanction taken against one of the three major rating agencies – S & P, Moody’s and Fitch Ratings – since the introduction of tougher regulation in the wake of the 2008 crisis.
“Investors rely on credit rating agencies such as S & P to rate the fairest way securities such as asset-backed commercial type of mortgages, said Andrew Ceresney, one of the responsible SEC. But S & P placed its own financial interests above those of investors by releasing its rating criteria in order to obtain contracts and hiding those changes to investors.”
For his part, Eric Schneiderman, the New York attorney, said: “In the wake of the housing crisis and the collapse of the global economy, the rating agencies like S & P had promised not to help another bubble by inflating the notes of the products they were asked to rate. Unfortunately, S & P broke that promise in 2011, by lying to investors in order to increase profits and market share.”
The settlement comes after changes in the legal department of McGraw Hill, which recently hired a new manager in the person of Lucy Fato, a former partner at Davis Polk lawyers. In a statement, S & P said they were “happy” to have turned the page with this litigation, emphasizing that it “takes very seriously compliance with regulatory obligations and continues to invest in staff and technology to strengthen its controls and risk management.”
S & P does not, however, end with the prosecution. The SEC continues to investigate a case against Barbara Duka, an employee of the credit rating agency, which had played a central role in the team that was responsible in 2011, noted the famous mortgages. In addition, the US Department of Justice and several prosecutors also continue with S & P for its role in the financial crisis. Again, an agreement is being finalized. The agency would be about to pay a fine of $1.37 billion to stop prosecutions of which it is subject, an amount that is about a year in profits for S & P.