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 Illinois will receive $52.5 million under the joint state-federal
settlement forged by the U.S. Department of Justice (DOJ), Madigan
and 19 other attorneys general and S&P, a subsidiary of McGraw-Hill
Companies that is one of the nation’s largest credit ratings
agencies responsible for independently rating risk on behalf of
clients and investors.
In 2012, Madigan was one of the first attorneys general in the
country to file a lawsuit against S&P for its misconduct that
contributed to the 2008 collapse. Madigan’s lawsuit alleged S&P
compromised its independence as a ratings agency by doling out high
ratings to unworthy, risky investments to increase its profits,
while its misrepresentations spurred investors, including Illinois’
pension funds, to purchase securities that were far riskier than
their ratings indicated.
“Standard & Poor’s deliberately exploited its trusted reputation as
an independent analyst to maximize profits and gain market share,
and in the process, S&P became a key enabler of the economic
meltdown,” Attorney General Madigan said. “Were it not for S&P
abandoning its core principles, these securities, made up of
unsustainable mortgages destined for default, could never and would
never have been purchased by many investors.”
According to the settlement, S&P consistently made
misrepresentations about the processes it used to assign credit
ratings to mortgage-backed securities. While publicly promising
independent, objective analyses, the company privately relaxed its
ratings criteria and manipulated subprime mortgage data to ensure
its clients’ mortgage-backed securities would achieve higher ratings
than the actual quality of the assets supported. These tactics were
part of an overarching corporate strategy intended to retain clients
and increase market share, according to the settlement agreement.
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 have
significant, real-world implications for Illinois institutional
investors, such as pension funds and 401(k) managers that make
decisions about whether, and which, of these securities are
appropriate investments. It was the misrepresentation of the true
risk of these mortgage securities that helped the housing market
skyrocket and ultimately led to its collapse in 2008.
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Under the settlement, S&P will pay a $1.375 billion penalty, which
exceeds the company’s profits earned for rating mortgage-backed
securities from 2002-2007. The majority of the relief awarded to
Illinois will be distributed to the state’s pension systems.
Further, S&P has agreed to a statement of facts acknowledging
conduct related to its analysis of structured finance securities.
S&P also agreed to comply with all applicable state laws and will
cooperate with requests for information from states that may express
concern over a possible violation of state law. The states have also
retained authority to enforce their laws – the same laws used to
bring these cases – if S&P engages in similar conduct in the future.
This settlement is the latest in a long line of enforcement actions
Attorney General Madigan has taken against banks, lenders and other
contributors of the financial crisis. As a result of all of
Madigan’s enforcement actions, she has recovered a total of
approximately $2.85 billion for Illinois homeowners, communities,
county recorders and pension funds.
Joining Madigan and DOJ in the settlement were attorneys general
from: Arizona, Arkansas, California, Colorado, Connecticut,
Delaware, Idaho, Indiana, Iowa, Maine, Mississippi, Missouri, New
Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee,
Washington and the District of Columbia.
Assistant Chief Deputy Attorney General Doug Rees, Consumer
Protection Division Chief Deborah Hagan, Consumer Protection Chicago
Bureau Chief Susan Ellis, Senior Assistant Attorney General Tom
James, Supervising Attorney and Assistant Attorney General Vaishali
Rao, and Assistant Attorney General Vijay Raghavan, Andrea Law and
Agnes Ptasznik handled the case for Madigan’s office.
[From the office of Attorney General
Lisa Madigan] |
