 Madigan filed her lawsuit in Cook County Circuit Court, alleging
that Standard & Poor's, or S&P, compromised its independence as a
ratings agency by doling out high ratings to unworthy, risky
investments as a corporate strategy to increase its revenue and
market share. The attorney general's lawsuit alleges that S&P
ignored the increasing risks posed by mortgage-backed securities,
instead giving the investment pools ratings that were favorable to
its investment bank client base and S&P's profits."Publically,
S&P took every opportunity to proclaim their analyses and ratings as
independent, objective and free from its desire for revenue,"
Madigan said. "Yet privately, S&P abandoned its principles and
instead used every trick possible to give deals high ratings in
order to retain clients and generate revenue. The mortgage-backed
securities that helped our market soar -- and ultimately crash --
could not have been purchased by most investors without S&P's seal
of approval."
The lawsuit cites numerous internal emails and conversations
among S&P employees in the run-up to the housing market's crash that
demonstrate the company misrepresented its ratings as objective and
independent. In one such exchange, in April 2007, an online
conversation via a company-based instant messenger application
revealed employees discussing S&P ratings compared with the reality
of risk involved, with an employee stating an investment "could be
structured by cows and we would rate it."
Madigan said investors relied on S&P ratings because they were
historically rooted in the agency's purported independence and
objectivity. S&P's internal code of conduct states its goal to
"promote investor protection by safeguarding the integrity of the
rating process." But, the lawsuit cites congressional testimony by a
former managing director of S&P who revealed that "profits were
running the show," with ratings being assigned to risky investments
to help drive profit margins for their clients.
S&P, a subsidiary of McGraw-Hill Cos., is one of the nation's
largest credit ratings agencies responsible for independently rating
risk on behalf of clients and investors. Madigan said that in the
run-up to the financial crisis, S&P consistently misrepresented the
risk of mortgage-backed securities, assigning these securities its
highest seal of approval -- or AAA rating. This misrepresentation
spurred investors to purchase securities that were far riskier than
their ratings revealed.
Mortgage-backed securities are financial products made up of a
pool of mortgages that are bundled together and sold as a security.
The assets are backed by residential mortgages, including subprime
mortgages. The performance of these investment products has
significant, real-world implications for Illinois institutional
investors, such as pension funds and 401(k) managers who make
decisions about whether, and which, of these securities are
appropriate investments. It was the misrepresentation of the true
value of these risky mortgage pools that helped the housing market
skyrocket and ultimately led to its collapse in 2008.
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The lawsuit is part of the attorney general's continuing work to
hold lenders accountable for their unlawful financial misconduct,
and to provide relief and assistance to Illinois families struggling
to save their homes.
Most recently, in December 2011, Madigan and the U.S. Department
of Justice reached a $335 million settlement with Countrywide, a
subsidiary of Bank of America, for discriminating against thousands
of Illinois borrowers of color during the height of the subprime
mortgage lending spree. The settlement will provide restitution to
harmed Illinois borrowers and is the largest settlement of a fair
lending lawsuit ever obtained by a state attorney general.
The attorney general is litigating a similar lawsuit against
Wells Fargo, alleging widespread discrimination against
African-American and Latino borrowers.
Madigan led an earlier lawsuit against Countrywide, which
resulted in a nationwide $8.7 billion settlement in 2008 over the
company's predatory lending practices. The attorney general also
reached a $39.5 million settlement with Wells Fargo over the bank's
deceptive marketing of extremely risky loans called Pay Option ARMs,
and in 2006, Madigan obtained more than $10 million in restitution
for Illinois homeowners as part of a $325 billion multi-state
settlement with Ameriquest over the former mortgage giant's
deceptive sales of predatory subprime mortgages.
Assistant Attorneys General Vaishali Rao and Vijay Raghavan are
handling the S&P case for Madigan's Consumer Fraud Bureau.
[Text from file received from the office
of
Illinois Attorney General Lisa
Madigan]
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