S&P to pay $1.4B over alleged inflated ratings on subprime bundles

Rating agency Standard & Poor's (S&P) has agreed to pay around $1.38 billion to settle a series of lawsuits and U.S. government allegations that it knowingly inflated assessments of risky subprime mortgage investments, a major factor in the 2008 financial crisis.

The settlement comes after years-long litigation over claims that S&P gave overly rosy ratings to mortgage securities in a bid to win more business.

Parent company McGraw Hill Financial said it would pay $687.5 million to the U.S. Department of Justice, and $687.5 million to 19 states and the District of Columbia, which had filed similar lawsuits over the ratings.

The settlement relates to ratings issued by S&P from 2004 through 2007.

McGraw Hill Financial said the settlement contains no findings of violations of law by itself, S&P Financial Services or Standard & Poor's Ratings Services.

But the development represents one of the government's key efforts to hold to account market players deemed responsible for contributing to the worst financial crisis since the Great Depression. The settlement announced Tuesday came after months of negotiations.

The Justice Department filed civil fraud charges against S&P two years ago this week. It accused the company of failing to warn investors that the housing market was collapsing in 2006 because doing so would hurt its ratings 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," Attorney General Eric Holder said in a statement on Tuesday.

The Justice Department had demanded $5 billion in penalties from S&P when it sued the company in February 2013. The payment of about $1.38 billion to settle the case is less than S&P's revenue in 2013 of $2.27 billion.

The three big rating agencies — S&P, Moody's Investors Service and Fitch Ratings — have been blamed for helping fuel the 2008 crisis by giving high ratings to high-risk mortgage securities. The high ratings made it possible for banks to sell trillions of dollars' worth of those securities. Some investors, such as pension funds, can only buy securities that carry high credit ratings.

Those investments soured when the housing market went bust in 2006.

Experts say the Justice Department's lawsuit against S&P could serve as a template for action against Fitch and Moody's.

S&P disputed the government's allegations when the federal suit was filed, calling the legal action "meritless" and the claims "simply not true."

The company insisted its ratings were based on a good-faith assessment of the performance of home mortgages during a time of market turmoil.

Last month, S&P agreed to pay the federal government, New York state and Massachusetts more than $77 million to settle separate charges by the Securities and Exchange Commission related to its ratings of high-risk mortgage securities after the crisis. The SEC had accused S&P of fraudulent misconduct, saying the company had loosened standards to drum up business in 2011 and 2012.

S&P neither admitted nor denied the charges in the settlement.

S&P also announced Tuesday that it will pay $125 million in a separate settlement with the California Public Employees' Retirement System to resolve its claims against the company regarding ratings on three structured investment vehicles. The settlement is not subject to judicial approval.

Wire services