A US judge has refused to dismiss a $5-billion government civil fraud suit against Standard & Poor’s, slamming the defendant’s argument that investors’ were at fault for trusting its credit ratings on mortgage-backed securities.
“Defendants repeatedly asserted that no reasonable investor would have relied on S&P’s claims of independence and objectivity. Regarding the question of materiality, S&P argued that, since the issuer banks had access to the same information and models that S&P analysts did, they could not have been fooled by faulty credit ratings,” US District Court Judge David Carter said in a written decision.
“This begs the question: if no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?”
The decision allows the government’s case against S&P to proceed.
The government is alleging that S&P inflated ratings on residential-mortgage-backed collateralized debt obligations (CDOs) in order to win more fees from issuers and banks. The complaint further charges that S&P failed to downgrade the ratings in spite of knowing about the deterioration of residential mortgage-backed securities.
Further the discussion. What's your take on S&P's rationale?