Tuesday, September 3, 2013

US government lawsuit is revenge for AAA downgrade, says S&P

S&P, America’s largest credit ratings agency, has also accused the government of curtailing its right to free speech, which is enshrined in the US constitution.
The Department of Justice (DoJ) is suing S&P for allegedly misleading banks about the risk of certain debt products in the run-up to the 2008 financial crisis, in order to boost the fees it could claim. The ratings agency also failed to downgrade the ratings it awarded the so-called collatoralised debt obligations (CDOs) even though it knew that the mortgage-backed securities they were based on were becoming increasingly shaky.
A number of major credit ratings agencies gave the CDOs high ratings at the time, but S&P is the only one being taken to court by the DoJ for allegedly misleading banks. It is also the only major ratings agency to have downgraded the US’s credit rating.
On Tuesday, the credit ratings agency accused the DoJ of pursuing an “impermissibly selective, punitive and meritless” lawsuit in “retaliation” for its decision to exercise “free speech rights with respect to the creditworthiness of the United States of America”. It made the claims in papers lodged in a California court – one of 16 parallel lawsuits S&P is fighting in different states to have the claims permanently dismissed on the grounds that the claimants are prejudiced.
S&P controversially downgraded America’s credit rating from the top-tier AAA status to AA-plus in 2011, to reflect fears that Washington’s failure to address the so-called fiscal cliff would jeopardise its ability to meet debt repayments. The downgrade outraged the US government and sparked sparked a sell-off of US shares.