WASHINGTON (AP) — Standard & Poor’s is prepared to spend years beating back a federal lawsuit that accuses the company of giving falsely high ratings to mortgage investments that helped trigger the financial crisis, executives said Tuesday.
“Rest assured, we will vigorously defend against these erroneous claims,” said Harold McGraw III, president and CEO of the McGraw-Hill Cos., which owns S&P, on a call with analysts.
The government may seek up to $5 billion — several years’ worth of profits for McGraw-Hill, it said in a civil complaint filed in Los Angeles federal court last week. The company believes the charges lack merit, but the case is likely to drag on for three or more years, general counsel Ken Vittor said on the call.
The call was scheduled in connection with McGraw-Hill’s fourth-quarter earnings report, which narrowly beat Wall Street’s forecasts, but executives spent much of it rebutting the government’s allegations.
Analysts on the call focused on the company’s ability to fend off the lawsuit and maintain growth in the Standard & Poor’s Rating Services division.
Executives said they expect the credit rating business to keep growing despite the new scrutiny. Low interest rates are making it easier for companies to issue bonds. Demand for ratings is spiking from emerging markets like India, they said.
The Justice Department accused S&P of knowingly inflating its ratings because it wanted to earn more business from its clients — the banks whose investments it was hired to rate.
According to the lawsuit, S&P recognized in 2006 that home prices were sinking and that borrowers were having trouble repaying loans. Yet these facts weren’t reflected in the safe ratings that S&P gave to complex real-estate investments known as mortgage-backed securities and collateralized debt obligations, the lawsuit alleges.
High ratings from the three agencies made it possible for banks to sell trillions in risky investments. Some investors, including pension funds, can buy only securities that carry high credit ratings.
The charges are the Obama administration’s most aggressive action to date against those deemed responsible for contributing to the worst financial crisis since the Great Depression.
It is not clear why the government charged only S&P, or whether it will file charges against Fitch and Moody’s, S&P’s two main rivals.
Responding to the charges Tuesday, executives noted that they have successfully defended against 40 other lawsuits related to the financial crisis. They said they are open to “discussing reasonable settlements” to end any lawsuits.
S&P declined to say how much the case is costing.