Standard & Poor’s agreed Wednesday to pay the U.S. government and two states more than $77 million to settle charges tied to its ratings of mortgage-backed securities.
In its first enforcement action against a major credit-rating company, the Securities and Exchange Commission accused S&P of fraudulent misconduct, saying the company loosened standards to drum up business in recent years. The agreement requires S&P to pay more than $58 million to the SEC, $12 million to New York and $7 million to Massachusetts.
“These settlements involve findings of intentional fraud in 2011 and 2012, well after the financial crisis,” said Andrew Ceresney, director of the SEC’s enforcement division, on a call with reporters. “The financial crisis may be behind us, but these cases are an important reminder that the race-to-the-bottom behavior exists even though the financial crisis has ended.”
S&P said in a statement that it did not admit or deny any of the charges.
It’s likely to be the first in a line of settlements between S&P and government agencies. In 2013, the Justice Department and attorneys general from other states filed civil lawsuits against the company for misrepresenting risks in the years leading up to the financial crisis.
As part of its agreement with the SEC, Standard & Poor’s Ratings Services, a division of McGraw Hill Financial, will take a “timeout” from rating certain types of mortgage-backed securities for a year.
“This is the first time a major credit rating agency has been subject to a timeout,” Ceresney said. “It’s unprecedented.”
Janet Tavakoli, president of Tavakoli Structured Finance, called the SEC’s actions “cosmetic.” The longtime critic of rating companies compared the settlement to forcing a drunk driver to pay for car repairs after a crash. What’s needed, she said, is an overhaul of how the companies analyze risk.
“It’s just the appearance of doing something,” she said. “They’re not really solving the problem.”
Mortgage-backed bonds played a large role in setting off the financial crisis in 2008. During the housing boom, banks bundled risky mortgages into other securities and sold them to investors in slices. Credit-rating firms awarded many of them top ratings, classifying mortgage-bonds among the safest of investments.
But when the housing bubble popped, many of these mortgage securities turned out to be worthless.
S&P, Moody’s and Fitch remain the country’s largest credit-rating firms. Asked if the other two were under investigation, Ceresney replied that he couldn’t offer specifics. “I can just say that this is an area in which I imagine that there will be future activity,” he said.
“It’s mystifying that they’re doing something now,” Tavakoli said. “How many years has it been since the financial crisis? Seven years and it still hasn’t been fixed.”