Standard & Poor’s to pay $1.4 billion settlement over mortgage crisis claims

Standard & Poor’s (S&P) has agreed to pay a $1.38 billion settlement to US regulators over allegations it knowingly inflated its ratings of risky mortgage bonds.

The deal with the Department of Justice also resolves 19 other lawsuits.

McGraw Hill – the parent company of S&P – said in a statement the “settlement contains no findings of violations of law”.

S&P is the first credit agency fined over financial crisis-era violations.

The settlement covers mortgage bond ratings between 2004 and 2007.

The bonds, which included sub-prime mortgages, were blamed for the collapse of the US property market and subsequent global financial crisis.

The DoJ filed civil fraud charges against S&P two years ago.

It accused the credit rating firm of giving top recommendations – known as triple-A ratings – to mortgage bonds that it knew contained sub-prime mortgage debt and were therefore not as safe an investment as the rating suggested.

The US government said that S&P’s ratings encouraged financial institutions around the world to buy and sell what proved to be “toxic” financial products in their trillions.

It also accused S&P of failing to warn investors that the housing market was collapsing in 2006 because doing so would have hurt its business.

At the time, S&P said the US government’s case was entirely without factual or legal merit.

“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Eric Holder in a statement announcing the settlement.

“As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets, because it was worried that doing so would hurt the company’s business.

“While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

S&P will pay $687.5 million to the DoJ and a further $678.5 million to the 19 states that had brought lawsuits against it.

The ratings agency will also pay $125 million in a separate settlement with the California Public Employees’ Retirement System.