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Tuesday, Feb 5, 2013
ATTORNEY GENERAL FILES SUIT AGAINST STANDARD & POOR'S
LITTLE ROCK - Attorney General Dustin McDaniel today filed a consumer protection lawsuit against Standard and Poor's, alleging that the credit rating agency intentionally misled investors in the way it rated the toxic assets at the heart of the nation's financial crisis.
S&P is accused of forsaking its claims of independence and objectivity by improperly rating structured finance securities that were backed by subprime mortgages. S&P allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients, according to the complaint filed in Pulaski County Circuit Court.
Structured finance securities backed by subprime mortgages were at the center of the financial crisis. These financial products, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly mortgage payments made by homeowners.
"Arkansas consumers expect credit-rating agencies to provide unbiased and independent analysis of securities," McDaniel said. "We believe S&P was more concerned with making additional profits than by assessing risk, and that the agency's actions are directly linked to the financial crisis."
McDaniel's suit alleges that S&P violated the Arkansas Deceptive Trade Practices Act. He asks the court to order S&P to stop making misrepresentations to the public and require the company to disgorge the profits gained from its misleading actions.
The federal government and several other states also filed suits against S&P today.
The complaints allege that S&P adjusted its analytical models for rating RMBS and CDOs to allow it to assign as many AAA ratings as possible, thus, earning additional revenue from its investment banking clients. Assessing actual credit risk was of secondary importance to revenue goals and winning new business, the complaints allege.
Further, the complaints allege that S&P's monitoring of previously rated RMBS and CDOs was also affected by revenue considerations. In particular, S&P delayed taking rating actions on impaired RMBS and continued rating new CDOs even after it determined that the security's underlying collateral was impaired, because it wanted to continue to earn lucrative fees.
The congressionally appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis "could not have happened" without the actions of ratings agencies such as S&P.
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