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S&P reportedly close to massive mortgage-bond rating settlement

WSJ: Department of Justice may get billions

Standard & Poor’s is reportedly closing in on a $1.37 billion settlement with the U.S. Department of Justice and more than a dozen states over claims that S&P knowingly misled investors by issuing trumped up ratings for pre-crisis residential mortgage-backed securities.

According to a report from the Wall St. Journal, the Justice Department would receive $687 million from S&P and the states would receive a similar amount to settle claims that were first levied against S&P two years ago.

In 2013, the DOJ and the group of states filed a civil suit against Standard & Poor's, and its parent company McGraw-Hill, for allegedly misleading investors who put money behind RMBS and collateralized debt obligations.

At the time, Attorney General Eric Holder said that S&P "falsely claimed that its ratings were independent, objective, and not influenced by the company's relationship with issuers who hired S&P to rate the securities in question."

S&P claimed at the time that the claims by the DOJ were “meritless” and said, “Claims that we deliberately kept ratings high when we knew they should be lower are simply not true."

S&P later said that the U.S. government was retaliating against them because the ratings agency stripped the country of its AAA credit rating. 

But now, the ratings agency is reportedly days away from announcing the massive settlement, which according to the WSJ report would be the largest amount paid by a ratings agency to resolve allegations of inflating bond grades in the pre-crisis era.

From the WSJ report:

A final pact isn’t yet signed, and the process could still drift into next week, the people said. But the states are close to completing their portion of the deal, which had been viewed as a potential delay on announcing the settlement, the people (familiar with the negotiations) said.

Most states will receive between $20 million to $25 million, though others will get more, the people said.

The settlement would mark the second time in less than a week that S&P has faced serious consequences from regulators over its ratings practices.

Last week, the Securities and Exchange Commission charged S&P with fraudulent misconduct related to the ratings of commercial-mortgage backed securities.

As HousingWire Executive Editor Jacob Gaffney wrote last week, part of the SEC charges against S&P also related to its ratings of RMBS transactions in the post-crisis era.

From the SEC order:

A third SEC order issued in this case involved internal controls failures in S&P’s surveillance of residential mortgage-backed securities ratings. The order finds that S&P allowed breakdowns in the way it conducted ratings surveillance of previously-rated RMBS from October 2012 to June 2014.

S&P changed an important assumption in a way that made S&P’s ratings less conservative, and was inconsistent with the specific assumptions set forth in S&P’s published criteria describing its ratings methodology.

S&P did not follow its internal policies for making changes to its surveillance criteria and instead applied ad hoc workarounds that were not fully disclosed to investors.

As a result of these charges, the SEC banned S&P from rating similar CMBS deals for a year. S&P agreed to pay more than $58 million to settle the SEC’s charges, plus an additional fines to three attorneys general. The fines cover the false ratings of six conduit fusion CMBS transactions in 2011.

And now it appears that S&P is about to fork over a lot more than $58 million for its ratings failings.

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