Five years after the financial crisis started to pick up steam, U.S. officials are finally bringing legal action against one of the three major credit rating firms. However, the motivation for the lawsuit is questionable to say the least.
The Department of Justice filed a civil lawsuit against Standard & Poor’s, alleging the McGraw-Hill (NYSE:MHP) unit improperly used its rating system to assign grades to mortgage bonds that did not predict the full magnitude of the housing downturn and nearly caused a meltdown of the global financial system. It would be the first federal enforcement action against a credit rating firm over the crisis and several states are likely to join the lawsuit.
For several years, the major rating agencies have been considered a prime suspect in the credit bubble, considering the firms essentially awarded junk bonds triple-A status and collected large fees in the process. The high ratings also paved the way for Wall Street to indulge itself on mortgage-backed securitization. According to unnamed sources, the Justice Department is seeking a 10-figure plus settlement and the admission of wrongdoing from Standard & Poor’s. In a statement on Tuesday, Attorney General Eric Holder said the U.S. is seeking as much as $5 billion in penalties. “This alleged conduct is egregious – and goes to the very heart of the recent financial crisis,” he said.
Naturally, the firm said it will vigorously defend itself against these erroneous claims…