AG Cooper challenges Standard and Poor’s for inflating ratings

S&P misrepresented its objectivity, contributed to nation’s financial meltdown
Feb 05, 2013

Raleigh: Credit rating agency Standard and Poor’s knowingly inflated its ratings for certain risky securities, contributing to the nation’s financial crisis, Attorney General Roy Cooper alleged Tuesday in a lawsuit he filed along with several other states and federal authorities.

“Investors thought they were getting objective information but they got misled and our entire economy paid a heavy price,” Cooper said. “These misrepresentations played a major role in creating the national financial crisis, and they must be prevented from happening again.”

Cooper filed a lawsuit today in Wake County Superior Court asking the court to stop Standard and Poor’s (S&P) from claiming objectivity to the public and require the company to change the way it does business.

Cooper and the other state attorneys general bringing similar actions seek to hold S&P accountable for misrepresenting its objectivity in rating securities that were backed by subprime mortgages. Investors and market participants relied on S&P to provide independent and objective credit ratings for these financial products. The federal and state complaints allege that S&P’s analyses were in fact influenced by fees paid by its investment bank clients. As a result, the company knowingly inflated credit ratings for high-risk assets packaged and sold by Wall Street banks.

Structured finance securities backed by subprime mortgages were at the center of the financial crisis. These financial products, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.

Cooper alleges that S&P publicly declared its objectivity while privately compromising it to get and keep the business of investment banks that were issuing these financial products and paying S&P to analyze and rate them. Assessing actual credit risk was less important to S&P than making money and winning new business, and the company adjusted its models to assign as many top ratings as possible so it could earn more money from its clients. S&P also delayed downgrading certain risky investments in order to continue earning lucrative fees.

S&P’s alleged misconduct began as early as 2001, became particularly acute between 2004 and 2007, and continued until as recently as 2011.