What message to Wall Street from US lawsuit against Standard & Poor's?
The Justice Department's civil lawsuit against the credit-rating agency Standard & Poor's aims to assign responsibility for the recent financial crisis. But expectations that Wall Street will change its ways are mixed.
With its civil lawsuit against credit rating agency Standard & Poorâ€™s, the US Justice Department is embarking on one of the most aggressive efforts yet to hold Wall Street accountable for the financial crisis.
As the government's first crackdown on a rating agency, the suit, filed late Monday in federal court in Los Angeles, marks a watershed moment in the investigation into the financial meltdown. Itâ€™s a bold move that the government is hoping will send a stern warning to Wall Street â€“ and has already sent a jolt through the stock market â€“ but one that some analysts predict will do little to change â€śbusiness as usual.â€ť
The Justice Department's lawsuit claims that S&P â€śknowingly, and with intent to defraud ... executed a scheme to defraud investorsâ€ť by giving triple-A ratings to shoddy mortgage-backed securities that led to one of the worst financial crises since the Great Depression.
â€śThe failures of credit rating agencies were essential cogs in the wheel of financial destruction," the Financial Crisis Inquiry Commission wrote in its final report, in 2011. â€śThis crisis could not have happened without the rating agencies.â€ť
S&P has acknowledged that its ratings were wrong, but insists it did not knowingly issue triple-A ratings to junk securities at a time when few on Wall Street or in the government saw the dangers posed by subprime lending. The DOJ suit "would be entirely without factual or legal merit," said S&P, in a statement.
"Regrettably, the breadth, depth, and effect of what ultimately occurred were greater than we â€“ and virtually everyone else â€“ predicted," the statement said.
And because it alone was singled out among other rating agencies that awarded sterling ratings to mortgage-backed securities, including Moodyâ€™s Corp. and Fitch Ratings, S&P has suggested the DOJ is retaliating for S&Pâ€™s downgrade of the US credit rating in 2011.
Nonetheless, the suit marks an aggressive new tack by the federal government. Â
â€śPart of whatâ€™s going on is closure about the financial crisis,â€ť says Jeffrey Manns, associate professor at George Washington University Law School in Washington.
Indeed, the suit is the governmentâ€™s attempt to hold Wall Street accountable for wrongdoing that led to the financial crisis, something the current administration has been accused of failing to do.
But will the DOJâ€™s civil suit amount to more than mere finger-pointing or a slap on the wrist? Will Wall Street take notice?
â€śIt could have a very significant effect on Wall Street,â€ť says Mr. Manns. â€śThe government is taking a more aggressive posture in seeking accountability, so itâ€™s certainly a warning to rating agencies and Wall Street as a whole that the government is going to hold actors accountable for wrongdoing.â€ť
In fact, the market has already reacted sharply to the governmentâ€™s suit. After news of the suit spread, McGraw-Hill, parent company of S&P, saw its stock tumble to levels not seen in 25 years. It plunged 13.8 percent Monday, the most it has fallen since the stock market crash in October 1987. Moodyâ€™s, the second-largest rating agency, also fell 10.7 percent.
The best-case scenario is that â€śthe investigation will help ensure greater responsibility in ratings,â€ť says Michael Greenberger, a professor at the University of Maryland School of Law in Baltimore and a former federal financial regulator who supports the lawsuit.Â The big lesson learned, he adds, is that â€śabuses [by rating agencies] were so great there will be less inclination to be dazzled by ratings themselves.â€ť
That, of course, is the best-case scenario. Some analysts expect little, if any, change on Wall Street as a result of the suit.
â€śVery little has changed in the culture of Wall Street ... and I expect little to change as a result of the pending suit,â€ť says Timothy Canova, professor of law and public finance at Nova Southeastern University in Fort Lauderdale, Fla. â€śAs long as these cases brought by the DOJ are civil claims settled out of court, it wonâ€™t be seen as much other than the cost of doing business. Not until criminal cases are brought against top executives on Wall Street [will things change].â€ť
Adds Mr. Greenberger, â€śFine these people all you want â€“ itâ€™s tantamount to you or I paying a traffic ticket. The only thing appropriate here is jail time.â€ť