Boston, MA 02/09/2013 (wallstreetpr) –Standard and Poor 500 responded to the lawsuit filed against it by the government in a news release. The lawsuit was filed against the company over the grades of its mortgage-bonds. In the news release, the company complained that it faces indictment over it inability to fully predict “the full magnitude of the housing downturn” despite the fact that “virtually everyone” else had failed to do so.
According to the federal prosecutors, S&P-500 failed to make adjustments on its analytical models or use other necessary means to reflect the risks that came with the securities in an efficient and accurate manner. The company, which is a unit of McGraw-Hill Companies (NASDAQ:MHP), is questioned whether its representation of how it provided credit grades and how conflicts were avoided is accurate.
The complaint was filed on Feb. 4 in Los Angeles’ Federal Court. It includes roughly 58 examples of executives of S&P ignoring warnings from analysts, casting off important data, attempting to appease issuers, accepting how pressure from the banking companies could affect the quality of its ratings or cause downgrade delays.
According to S&P, the Justice Department is incorrect in saying that the company’s ratings were influenced by commercial considerations. “Extensive” downgrades were issued before competitors and it had analysts who worked hard to catch up to an environment that was increasingly volatile and ever-changing. It also said that its rivals had also matched the ratings it had given on all of the collateralized debt obligations and other debts of the same type.
The Justice Department said that the CDO group had refined its models to bring in more business. At a meeting in 2006, the decision to being assuming that there was no correlation between RMBS’s performance and CDOs that were filled with securities that were backed up by assets, according to the plaint that was filed.
The Justice Department said, “Tesher and other business personnel were in favor of this decision, which was made without the benefit of any data and would lead to S&P’s rating models arriving at lower estimates of credit risks for CDOs collateralized by such assets.”
According to Manal Mehta, the founder of Sunesis Capital LLC, n 2007, S&P emerged as “enablers of the grand fraud” which involved issuance of CDOs filled with credit-default exchanges, by the banks. The swaps were bets that were made on the performance of mortgages instead of being backed by genuine loans.
In March 2007, S&P had given grants or confirmation on initial ratings on CDOs worth $51 billion, the plaint read.
In 2005, David Wyss, who was then the company’s chief economist, said that the prices would probably fall 20 per cent in the nation and almost 30 per cent in the West and East Coast. This was during a conference call held for investors where analysts discussed multiple S&P special reports published regarding the housing and other companies related to it after it had gained immensely.
The case is US v McGraw-Hill, 13-00779 , US District-Court, Central District, California.
The shares of McGraw-Hill Companies (NASDAQ:MHP) were down by 2.60% to close at $42.67.