Government sues S&P for 'triggering' 2008 meltdown

Accused Sandy Hook killer Adam Lanza

The Justice Department will prove that the Standard and Poor credit rating agency caused the financial meltdown of 2008 by reporting falsely inflated values of mortgage-backed derivative securities.

In a suit filed in the central district of California, the government alleges the agency, which is a subsidiary of McGraw-Hill, engaged in three types of fraud to bilk investors – many of them banks and credit unions – out of an estimated $500 billion.

Alleged Aurora shooter James Holmes

The lawsuit is based on the provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). According to the complaint, S and P engaged in 1) mail fraud, 2) wire fraud, and 3) financial investment fraud to keep its ratings “artificially high.”(click here for an industrial report)

“Put simply, the alleged conduct is egregious and goes to the heart of the financial crisis,” said Attorney General Eric Holder.

The credit rating agency released a statement declaring it will defend itself against what it called “meritless” allegations, terming the complaint an “unwarranted claim.”(click for statement)

While Standard & Poor is “disappointed” with the performance of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO), the statement says, “S and P's ratings were based on the same subprime mortgage data available to the rest of the market, including the U.S. Government...”

According to leading industrial pundits and knowledgeable observers, the lawsuit brings back to light a 2011 finding by the Senate Permanent Subcommittee on Investigations in which staff issued a report that alleged “inaccurate triple-A credit ratings introduced key risk” in themarket, an accusation which mirrors a similar report of the FinancialCrisis Inquiry Commission.(click here for a report)

When S and P declared “massive downgrades” of the securities, it “more than any other event triggered the beginning of the financial crisis,” according to the Senate report.

The fathers of two individuals who murdered large numbers of people with firearms were scheduled to testify before the Senate committee. They are both involved in writing algorithms that predict the worth of such securities, employed by credit services agencies FICO and GE Capital. (click here for a previous report)