S&P to settle with feds for $1.38B

Associated Press

WASHINGTON

More than six years after the financial crisis struck, credit-rating giant Standard & Poor’s will be paying a hefty $1.38 billion penalty for its role in fueling the subprime mortgage meltdown. But that doesn’t mean it can’t happen again.

S&P’s settlement announced Tuesday with the U.S. government, 19 states and the District of Columbia marks a public chastening of a major credit-rating agency accused of knowingly overrating toxic mortgages that ignited the crisis. S&P and its competitors are crucial gatekeepers that can affect a company’s or government’s ability to raise or borrow money. In the aftermath of the crisis, federal regulators have imposed some changes on how the rating agencies conduct business.

Yet the fundamental conflict of interest at the heart of the rating agencies’ business remains intact: They continue to be paid by the companies whose securities they rate.

“This doesn’t fix anything,” said Janet Tavakoli, the president of Tavakoli Structured Finance and a former investment banker. “This is just a traffic ticket.”

Tavakoli cites a number of problems, including payments that companies and banks make to the agencies for ratings, as well as flawed statistical methods. The government should go further and strip the big rating agencies’ national licensing for rating complex securities, she suggested.

The process for companies and rating agencies is akin to having a pitcher choose the umpire, critics of the industry say, and it puts pressure on the agencies to award better ratings in order to secure repeat business.

That’s exactly what the government asserts S&P did in ratings on billions of dollars of securities that it issued from 2004 through 2007. The settlement resolves a court fight that began with a Justice Department lawsuit two years ago. S&P was accused of failing to warn investors that the housing market was starting to collapse in 2006 because doing so would hurt its ratings business.