Yesterday, we posted about the news that the DOJ would sue S&P concerning its ratings of certain CDO transactions. This morning, the DOJ announced the filing of its civil lawsuit against S&P in the Central District of California.
The announcement summarized the Complaint (available here) as follows:
…S&P publicly represented that its ratings of RMBS and CDOs were objective, independent and uninfluenced by the potential conflict of interest posed by S&P being selected to rate securities by the investment banks that sold those securities. Contrary to these representations, from 2004 to 2007, the government alleges, S&P was so concerned with the possibility of losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess the credit risks posed by RMBS and CDOs. According to the complaint, S&P weakened those criteria and models from what S&P’s own analysts believed was necessary to make them more accurate. The complaint also alleges that, from at least March to October 2007, and because of this same desire to increase market share and profits, S&P issued inflated ratings on hundreds of billions of dollars’ worth of CDOs. At the time, according to the allegations in the complaint, S&P knew that the quality of non-prime RMBS was severely impaired, and that the ratings on those mortgage bonds would not hold. The government alleges that S&P failed to account for this impairment in the CDO ratings it was assigning on a daily basis. As a result, nearly every CDO rated by S&P during this time period failed, causing investors to lose billions of dollars.
The government seeks $5 billion from S&P. DOJ stated that the “underlying federal investigation, code-named ‘Alchemy,’ that led to the filing of this complaint was initiated in November 2009 in connection with the President’s Financial Fraud Enforcement Task Force.”
The Complaint draws from and cites S&P’s emails, instant message exchanges and internal memoranda in support of its claims that, among other things, S&P was aware of the deteriorating housing market and did not adjust its methodologies. The media has focused on one particular March 2007 email where an analyst created his own version of the Talking Heads song “Burning Down the House,” which parodied the imploding housing market. The analyst subsequently recorded a video of himself “singing and dancing” the first verse of the song in S&P’s office. (For coverage of the Talking Heads email, please see here and here.)
Reuters reported that sixteen states and the District of Columbia are also suing S&P.