WASHINGTON – Standard & Poor's says the government plans to file a civil lawsuit alleging wrongdoing by the agency when it gave high ratings to mortgage debt securities that later plunged in value and fueled the 2008 financial crisis.
S&P said Monday that it has been told by the Justice Department that it intends to file a civil lawsuit focusing on S&P's ratings on some mortgage debt securities in 2007. A suit would mark the first enforcement action by the federal government against a major rating agency over the issue.
The big rating agency denies any wrongdoing and says any lawsuit would be without factual or legal merit.
A suit would "disregard" the fact that S&P reviewed the same data on risky mortgages as the rest of the market and U.S. government officials, who publicly said in 2007 that the problems in the subprime mortgage market appeared to be limited, the company said.
In a statement, S&P said it "deeply regrets" that its ratings on the securities "failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time." However, the company said, it took "extensive" rating actions in 2007, before other rating agencies, on the mortgage-backed securities that were included in a mix of mortgage securities.
Justice Department spokeswoman Nanda Chitre declined to comment on the matter.
S&P is a unit of New York-based McGraw-Hill Cos. The company's stock was down 13 percent in heavy trading Monday amid a broader market decline.
S&P and the other two major agencies, Moody's Investors Service and Fitch Ratings, have been blamed for helping fuel the crisis by giving AAA ratings to trillions of dollars in risky securities backed by subprime mortgages. The securities later sank in value when the housing market bubble burst and home-loan delinquencies soared, causing tens of billions of dollars in losses for major U.S. banks.
The rating agencies are crucial financial gatekeepers. The grades they assign can affect a company's ability to raise or borrow money and how much investors will pay for securities it issues.
The securities in the anticipated federal lawsuit are collateralized debt offerings, or CDOs. CDOs are securities that contain many underlying mortgage loans.
A CDO generally gains in value if borrowers repay, but lose value if they default. Soured CDOs have been blamed for intensifying the financial crisis.
Critics say rating agencies have an inherent conflict of interest: They're paid by the companies whose products and credit they rate. The agencies have been accused of issuing unduly high ratings before the crisis because of pressure from banks they wanted as clients.