The US Justice Department and some US states on
Monday informed the ratings agency Standard & Poor's that they plan
to file a civil lawsuit over its overly optimistic evaluation of
mortgage-backed securities.
The optimistic evaluations were made prior to the financial crisis
triggered by a collapse in the housing market. Many investors based
their decisions on whether to invest in the ratings. As the crisis
unfolded in 2007 and 2008, the triple-A rated securities drastically
lost value.
The Justice Department's plans to sue were reported in the Wall
Street Journal Monday. The ratings agency later confirmed the report,
saying the threatened lawsuit was "without legal merit and unjust."
Standard & Poor's said the complete extend of the devaluation of
real estate wasn't foreseen by anyone else - neither its competitors
nor government agencies. It also said it reacted quicker than other
rating agencies by implementing far-reaching measures.
The ratings agencies have been criticized for years, but have
defended themselves successfully by saying they only gave their
opinion and didn't recommend buying.
A civil lawsuit filed by the Justice Department and state
prosecutors would be the most serious attack on the ratings agency to
date. Standard & Poor's is the number one ratings agency, but it is
often named in the same breath with Moody's and Fitch in discussions
about the role of the financial crisis.
Ratings agencies were assigned by banks to evaluate the
probability of mortgage-backed securities dropping. These securities
are the underlying basis of the US real estate market and are
purchased by banks worldwide.
