Standard & Poor’s has agreed to pay $1.4 billion to settle charges that it issued inaccurate credit ratings on investments tied to subprime mortgages before the financial crisis, according to Justice Department officials.
The settlement, expected to be announced later Tuesday, comes nearly two years after the Department of Justice first accused S&P of giving top ratings to poor quality mortgage-backed securities between 2004 and 2007. According to the lawsuit, S&P gave the deceptive ratings so it could collect fees from the financial firms that sold the securities.
The suit was the first federal action against one of the country’s major ratings agencies, which have long been cited as key culprits in the real estate-fueled financial meltdown.
S&P had initially argued that the lawsuit lacked merit and suggested that the government was acting in retaliation for downgrading the United States credit rating in 2011.
The ratings agency is expected to acknowledged in the settlement that it never found any evidence to back up its claim.
S&P is also facing similar lawsuits from attorneys general in several U.S. states and the District of Columbia.
Last month, S&P paid $58 million to the Securities and Exchange Commission and another $19 million to settle similar charges with the attorneys general in New York and Massachusetts.
Ratings matter to investors who rely on the agencies to analyze risk and give debt a “grade” that reflects a borrower’s ability to repay loans. The safest investments are rated “AAA.”
In the years preceding the 2008 financial meltdown, a large numbers of securities received AAA ratings even though they were backed by risky mortgages.
Pension funds and insurance companies, which invest billions of dollars, are required to hold a certain percentage of highly rated securities in their portfolios. These funds bought gobs of the top-rated securities, not knowing that they were actually of poor quality.
Those mortgage-backed securities paid investors well when housing prices were going up and borrowers could sell their homes at a profit. But as the housing bubble burst, foreclosures soared and the value of the securities plunged.
Federal prosecutors said they identified more than $5 billion in losses from just one set of securities that were rated by S&P between March and October of 2007.
Federal investigators are now reportedly turning their sights on Moody’s, the No. 2 ratings agency.
— CNNMoney’s Chris Isidore contributed to this report.