Standard & Poor's Rating Services (S&P) has announced that it received word from the U.S. Department of Justice (DOJ) of an impending civil lawsuit focusing on its ratings of certain U.S. collateralized debt obligations (CDOs) in 2007.
News of the litigation was first reported by the Wall Street Journal. A DOJ spokesperson declined to comment on the news report, and it is uncertain when the department will make a formal announcement on the lawsuit.
S&P issued a four-page statement that rebuked the DOJ's pending litigation.
‘A DOJ lawsuit would be entirely without factual or legal merit,’ says S&P in its statement. ‘It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including U.S. government officials who, in 2007, publicly stated that problems in the subprime market appeared to be contained – and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency.
‘S&P deeply regrets that our CDO ratings failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time,’ the rating agency adds. ‘However, we did take extensive rating actions in 2007 – ahead of other ratings agencies – on the residential mortgage-backed securities, which were included in these CDOs. As a result of these actions, more collateral or other protection was required to support AAA ratings on CDOs. With 20/20 hindsight, these strong actions proved insufficient – but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.’