Standard & Poor's to Pay $77m Over Misconduct in Rating Mortgage Securities

Strategic Insights -

Standard & Poor's, one of the largest credit rating agencies, has agreed to pay $77m to regulators over its misconduct in rating mortgage securities. The US Securities and Exchange Commission (SEC) found that S&P had engaged in a "race to the bottom" to win business, misrepresenting the rigour and conservatism of its ratings on mortgage securities as recently as last summer. This is a precursor to a much bigger settlement over S&P's crisis-era mortgage ratings, which the US Department of Justice alleges were artificially inflated to win business.

Key Takeaways:

  • S&P has agreed to pay $77m to the SEC and two other regulators over its misconduct in rating mortgage securities.
  • The regulator's investigation found that S&P had engaged in a "race to the bottom" to win business, misrepresenting the rigour and conservatism of its ratings on mortgage securities as recently as last summer.
  • S&P has been banned from rating certain types of commercial mortgage-backed securities (CMBS) deal for a year, the largest settlement since the SEC assumed greater enforcement powers over rating agencies.
  • Regulators have been increasing scrutiny of potential conflicts of interest at rating agencies, which are paid by bond issuers and so may have an incentive to offer a rosy assessment of a bond's credit-worthiness.
  • Investors rely on credit ratings to assess a bond's risk.
  • The SEC launched an administrative proceeding against Barbara Duka, S&P's former head of CMBS, who allegedly instituted the shift in ratings criteria.
  • S&P misrepresented its methodology for assessing residential MBS between 2012 and last summer, having changed to a less conservative model and implemented "ad hoc workarounds that were not fully disclosed to investors".
  • S&P did not admit to the new allegations, although it made admissions of fact regarding the CMBS failings in 2011.
  • S&P said it "continues to make investments . . . to strengthen its controls and risk management".

Statistics:

  • S&P has agreed to pay $77m to regulators.
  • S&P has been banned from rating certain types of CMBS deal for a year.
  • Investors rely on credit ratings to assess a bond's risk.
  • The SEC has launched an administrative proceeding against Barbara Duka, S&P's former head of CMBS.
  • S&P rated 24 CMBS conduit deals since the financial crisis out of a total of 146 that have come to market.

Sources:

  • New York Times, "Standard & Poor's to Pay $77m Over Misconduct in Rating Mortgage Securities"
  • Financial Times, "S&P fined $77m by US regulators over mortgage ratings scandal"
  • SEC Press Release, "SEC Charges Standard & Poor's with Misleading Investors in Commercial Mortgage-Backed Securities"