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Madigan Sues S&P For Role In Housing Market Meltdown

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Illinois Attorney General Lisa Madigan (Photo by Joshua Lott/Getty Images)

Illinois Attorney General Lisa Madigan (Photo by Joshua Lott/Getty Images)

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CHICAGO (STMW) – Illinois Attorney General Lisa Madigan has filed a lawsuit against Standard & Poor’s claiming the credit ratings agency fraudulently gave high ratings to risky mortgage-backed investments in the years prior to the 2008 housing market crash.

The suit, filed Wednesday in Cook County Circuit Court, alleged that S&P compromised its independence by giving its highest ratings to unworthy, risky investments as a corporate strategy to increase revenue and market share, a release from the AG’s office said.

The suit alleges S&P ignored the increasing risks posed by mortgage-backed securities, instead giving the investment pools ratings that were favorable to its investment bank client base and its own profits.

“Publicly, S&P took every opportunity to proclaim their analyses and ratings as independent, objective and free from its desire for revenue,” Madigan said. “Yet privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue. The mortgage-backed securities that helped our market soar — and ultimately crash — could not have been purchased by most investors without S&P’s seal of approval.”

The suit cites numerous emails and conversations among S&P employees in the run-up to the housing crash which Madigan claims demonstrate the company misrepresented its ratings as objective and independent. In one such instant messenger exchange in April 2007, employees discussing S&P ratings compared to the reality of risk involved, said investments “could be structured by cows and we would rate it.”

Madigan said investors relied on S&P ratings because they were historically rooted in the agency’s independence and objectivity. S&P’s internal code of conduct states its goal is to “promote investor protection by safeguarding the integrity of the rating process.”

The lawsuit, however, cites congressional testimony by a former managing director of S&P who revealed “profits were running the show,” with ratings being assigned to risky investments to help drive profit margins for clients.

Madigan said in the run-up to the financial crisis, S&P consistently misrepresented the risk of mortgage-backed securities, assigning these securities its highest seal of approval — a AAA rating. This spurred investors to purchase securities that were far riskier than the ratings revealed.

It was the misrepresentation of the true value of risky mortgage pools that helped the housing market skyrocket and ultimately led to its collapse in 2008, according to Madigan.

“This case is without merit and we will defend ourselves vigorously,” Standard & Poor’s spokesman David Wargin said of the suit.

The AG said the suit is part of an ongoing effort to hold lenders accountable for financial misconduct, and to provide relief and assistance to families struggling to save homes. Madigan led a suit against Countrywide which resulted in a nationwide $8.7 billion settlement over predatory lending practices.

She also reached a $39.5 million settlement with Wells Fargo over deceptive marketing of extremely risky loans called Pay Option ARMs; and in 2006, obtained more than $10 million for Illinois as part of a $325 million multi-state structured settlement with Ameriquest over deceptive sales of predatory subprime mortgages, the release said.

(Source: Sun-Times Media Wire © Chicago Sun-Times 2012. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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