Attorney General Lisa Madigan today announced a $1.375 billion settlement with Standard & Poor’s to resolve allegations that the credit ratings agency compromised its independence and objectivity in assigning its highest ratings to risky mortgage-backed securities in the lead up to the 2008 economic collapse.
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.
Under today’s 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.
- Roadiepig - Tuesday, Feb 3, 15 @ 9:43 am:
Alright! The pension deficit just dropped by around $52 million dollars (that’s if they actually put the settlement in the funds as stated. We all know how well the state has done depositing funds into the pensions in the past )
- Beans and Franks - Tuesday, Feb 3, 15 @ 9:45 am:
Good work Governor Madigan!
- DuPage - Tuesday, Feb 3, 15 @ 9:46 am:
Every penny of it should go in the pension systems.
- VanillaMan - Tuesday, Feb 3, 15 @ 9:46 am:
The majority of the relief awarded to Illinois will be distributed to the state’s pension systems.
Now - file suit against the folks who took from the state’s pension system and not pay into it. It is time for the public to see who is responsible for the pension system’s problems. It is time for this new governor to see that the state employees pension fund is the victim here, not the victimizer.
- Formerly Known As... - Tuesday, Feb 3, 15 @ 9:46 am:
Does this make us even now? /s
==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.==
==The Securities and Exchange Commission today charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.==
- Soccermom - Tuesday, Feb 3, 15 @ 9:47 am:
I am singing a little song about the rating agencies. The tune is kind of bouncy, and the lyrics are, “I hate them. Oh how I hate them. I hate them so much, I really hate them.”
Sing along with me, Illinois taxpayers who are shelling out extra dollars for the added interest we have to pay on our bonds because the rating agencies say so, even though there is no increased risk…
- The Muse - Tuesday, Feb 3, 15 @ 9:52 am:
Although it’s hard to determine the true cost of their actions - social and economic - at least the fine is substantial enough to, hopefully, deter them from acting the same way.
- Gabe - Tuesday, Feb 3, 15 @ 9:52 am:
The people who lost their homes and retirements must be so relieved to see that S&P was able to settle and nobody got in trouble.
- SAP - Tuesday, Feb 3, 15 @ 10:04 am:
Great start. Just 2,134 more of these and the state pension funds will be bailed out.
- Wordslinger - Tuesday, Feb 3, 15 @ 10:18 am:
The settlement is sick, not a thing to celebrate at all. They should all be in jail. If they had been so brazen in knocking over a liquor store, they would be.
History will judge harshly the political culture and politicians across the spectrum, starting at the top with Obama, who allowed these crimes to go unpunished.
You can read the same emails the Justice Department did, in which these prostitutes joked about assigning AAA ratings to securities they either knew were junk or had no idea whatsoever as to their underlying values.
Anybody who lost a job in the crash, or their house, or saw their savings wiped out, or whose mortgage is still under water — these are the triggermen. The moral hazard created could not have happened without them.
To the Justice Department, once again, the consequences for crashing the world economy and inflicting all that human suffering is a cost of doing business fine with no admission of guilt.
Not only are these crooks still living large, they’re still in business. By law, as taxpayers, you still have to pay the rating agencies a fat fee every time the state or your local governments issue debt.
Anyone who thinks unlimited money in politics is just “free speech,” here is yet another example to disabuse you of that notion. These crooks are untouchable because politicians of all stripes need their money.
The Mafia was nickel and diners compared to these guys.
- A guy - Tuesday, Feb 3, 15 @ 10:25 am:
It’s good news. If we can generate a few more policies that offer good news, heck, we might recover from years of bad policy making on every side of the aisle. I’ll take good news no matter where it comes from. Bravo Madam AG.
- Formerpol - Tuesday, Feb 3, 15 @ 10:31 am:
These AG settlements are often real give-aways, but which provide the public official with a big press pop. The tobacco settlement, for example, gave some 35 AGs a big press conference to announce billions in recovery, but a close look at the settlements and how they have played out over time reveal that Big Tobacco really took ‘em to the cleaners. The temptation for an easy settlement and a big presser is just too much to resist. I hope this settlement is not in this category, but history and my skepticism caution otherwise.
- Jocko - Tuesday, Feb 3, 15 @ 10:31 am:
By my math, there’s another 377.5 million out there. Shouldn’t each of the 19 states get 72 million?
Not that I’m complaining, but I see this as a start. I’d like to see some people have a stay at Club Fed, but they’re going to keep settling these cases for pennies on the dollar.
- Judgment Day - Tuesday, Feb 3, 15 @ 10:36 am:
Just to put the level of corruption involved into this settlement into perspective:
Time Period 2002-2007: First off, notice how none of the ‘newsies’ talk about how much S&P issued during this same time frame as credit ratings for MBS (mortgage backed securities). or what their fees were?
Hint: It’s at least $750 bil in face, could be easily over $1 trillion dollars.
$1.5 bil/$1 trillion = .0015%
Anybody really think that S&P only charged .0015 of a penny against the per dollar face value of all the issues they rated?
Really?????
Does anybody in the IL AG office ever do any math???
Don’t care about Aron Schock’s office decorations - worry about the real money.
- Cook County Commoner - Tuesday, Feb 3, 15 @ 12:59 pm:
And once again no individuals are jailed. Figures. These are NRSROs (Nationally Recognized Stastical Rating Organizations). A public trial to verdict would give the voters a glimpse how they became Nationally Recognized by the federal government. The bread crumb trail must be kept secret.
- Anonymous - Tuesday, Feb 3, 15 @ 1:25 pm:
Soccermom, you got a deft touch for lyrics. You can rhyme the tick of time (Johnny Cash tribute to Bob Dylan on Nashville Skyline). For an encore, please turn your guns on the Big Banks…..we’ll have ourselves a Financial Festivus
- crazybleedingheart - Tuesday, Feb 3, 15 @ 2:12 pm:
Standing on desk, saluting wordslinger.
- Precinct Captain - Tuesday, Feb 3, 15 @ 2:41 pm:
==- Judgment Day - Tuesday, Feb 3, 15 @ 10:36 am:==
This is a multi-state settlement and it includes the feds, so your bones to pick should go well beyond the Illinois AG, but extend to 19 other states and the DOJ as well. However, it was easier for you to Madigan bash than look at facts and reality. That’s pretty sad.
- John Parnell - Tuesday, Feb 3, 15 @ 3:30 pm:
And just yesterday Jamie Dimond, the CEO of J. P. Morgan complains his earnings were bad because there is too much regulation.
- Judgment Day - Tuesday, Feb 3, 15 @ 3:37 pm:
Just wait until the first set of derivatives are actually placed into official ‘default’ status. That’s when dear olde Jamie’s life will get really interesting…..
- anon - Tuesday, Feb 3, 15 @ 4:53 pm:
These guys helped cause the Great Recession. Will any of them be held criminally liable? If not, why not, given the $trillions that the middleclass lost?
- Mama - Wednesday, Feb 4, 15 @ 12:02 am:
The money should be used to pay off the bills and not spent on some stupid pork project.
- Mama - Wednesday, Feb 4, 15 @ 12:10 am:
Will the folks who lost their homes see any of this money?
- Tex - Wednesday, Feb 4, 15 @ 8:20 am:
I don’t get why S&P’s actions were not criminal fraud–intentional deception for personal gain.
- Wordslinger - Wednesday, Feb 4, 15 @ 8:51 am:
Tex, the actions were criminal fraud.
Too big to fail, too big to jail.