US SEC considers action against Standard & Poor’s for giving top ratings to mortgage-backed investments shortly before they imploded in the financial crisis.
US regulators have warned credit rating agency Standard & Poor’s they are considering taking action over its rating of mortgage-backed investments ahead of the 2008 financial meltdown. It would be the first time a ratings agency has been called to account by a US regulator since the credit crisis.
S&P’s parent company McGraw-Hill confirmed it has received notice that the Securities and Exchange Commission (SEC) is considering action over ratings the agency gave to portfolios of mortgages and other debts known as collateralised debt obligations (CDOs) dating back to the financial crisis.
The ratings agencies received widespread criticism for their role in the financial crisis after giving AAA ratings to investments made up of sub-prime home loans that subsequently imploded. S&P attracted more heat in August when it downgraded the US’s debt. A move that US treasury secretary Tim Geithner said showed «terrible judgement».
The SEC is weighing action over a particular CDO known as Delphinus CDO 2007-1, which was singled out as a «striking example» of what went wrong in the credit crisis by the Senate committee report Wall Street and the Financial Crisis, published in April.
The $1.6bn (£1bn) CDO was downgraded a few months after AAA ratings were issued by both S&P and rival Moody’s. The ratings agencies awarded tranches of the investment their top grade in July and August of 2007 but had begun downgrading them by the end of the year, «and by the end of 2008, had fully downgraded its AAA-rated securities to junk status,» according to the report.
The notification, known as a Wells Notice, allows the company to address issues before any enforcement decisions are made. McGraw-Hill said it is co-operating with the SEC. «S&P has been co-operating with the commission in this matter and intends to continue to do so,» the company said in the statement.
The SEC’s moves comes amid reports that the justice department is investigating the role of the top credit ratings agency in the years leading up to the financial crisis. According to reports the justice department is investigating allegations that analysts were pressured into awarding higher ratings to investments by business managers in other divisions.
guardian.co.uk