Key credit-rating firm acknowledges role in financial crisis in one of state’s largest consumer protection recoveries
SEATTLE — Attorney General Bob Ferguson today announced Standard & Poor’s Financial Services LLC will pay Washington state $21.5 million as a result of an investigation into the company’s misleading of investors when it rated structured finance securities in the lead-up to and the years following the 2007-08 financial crisis.
In addition to Washington, the credit rating agency will settle similar claims with the U.S. Department of Justice and the coalition of 18 other states and the District of Columbia that worked on the case. Washington played a key role in the matter, filing suit in Snohomish County Superior Court.
In total, S&P will pay $1.4 billion to the federal government and the coalition of states. S&P will pay $687.5 million to the DOJ and another $687.5 million to the states. Washington’s share will be more than $21.5 million, one of the state’s largest ever consumer protection recoveries, which is due to the state in 30 days. The overall payment is expected to wipe out S&P’s operating profit for the year.
“To protect its own profits, S&P inflated the credit ratings of toxic, mortgage-backed assets, jeopardizing the financial future of millions of people who were invested in these securities,” Ferguson said. “My office is charged with ensuring that companies play by the rules, and this agreement, the result of nearly two years of hard-fought litigation, holds S&P accountable for its role in the financial crisis.”
In the agreement, S&P acknowledges its credit ratings of structured securities were not the objective, impartial risk assessments it claimed to offer the market. Rather, the ratings were improperly influenced by S&P’s considerations of revenue and market share.
Structured finance securities backed by subprime and other mortgages were at the center of the 2007-08 financial crisis. These financial products, including residential mortgage backed securities (RMBS), commercial mortgage backed securities (CMBS), and collateralized debt obligations (CDOs), derive their value from monthly debt payments. Investors rely upon third-party debt rating agencies like S&P to provide a fair, impartial assessment of the risk profile of these instruments to assess their appropriateness for their portfolios.
The sudden implosion of many of these securities — backed in many cases by S&P’s solid AAA ratings — took many investors by surprise and rippled throughout the economy as whole. Retirement accounts, pension funds and other investments took heavy losses, which contributed significantly to the collapse of the financial markets, the foreclosure crisis, and the Great Recession.
S&P’s actions caused significant damage to Washington state’s economy, particularly in the form of lost tax revenue. For that reason, $18 million of the funds received will return to the state’s general fund. Another $3 million will be set aside to help victims of the mortgage and financial crisis. The remainder will repay the state’s costs and fees associated with the case.
In February 2013, Washington, the Department of Justice, the District of Columbia and 15 additional states sued S&P. Connecticut, Mississippi, and Illinois had previously filed suit.
The federal and state complaints set forth a scheme in which, while repeatedly emphasizing its independence and objectivity to investors and regulators, S&P instead succumbed to the appeal of lucrative fees from its investment banking clients and vouched for the soundness of risky, complex financial instruments.
When the investments backed by subprime mortgages failed, investors suffered significant losses that contributed to the destabilization of the entire U.S. — and indeed global — financial system. Even those who had not invested in these financial products suffered as the result of a seizure in the debt markets, plunging equity values, falling home prices and high unemployment.
As part of the agreement, S&P will comply with all applicable state laws, including Washington’s Consumer Protection Act, and for five years will cooperate with any request for information from any state expressing concern over a possible violation of state law. Washington will file a consent decree in Snohomish County Superior Court to implement the terms of the settlement agreement and resolve its lawsuit.
In August 2014, the Securities and Exchange Commission adopted new requirements for credit rating agencies that address conflicts of interest and procedures to protect the integrity and transparency of rating methodologies. The ratings agencies were also required to certify credit ratings, attesting that they were not influenced by other business activities.
In addition to Washington, the states involved in today’s resolution include Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, and Tennessee, as well as the District of Columbia.
Ferguson especially thanks Connecticut Attorney General George Jepsen for his office’s exceptional leadership and partnership throughout this case.
Consumer Protection Division Chief Shannon Smith and Assistant Attorney General Benjamin J. Roesch are leads on this case for Washington.
The settlement documents and the statements of facts will be available later today at www.atg.wa.gov.