SEC Investigating Standard & Poor’s Role in Mortgage-Crisis CDO
Brian Glaser Contact
September 27, 2011
On Monday, Standard & Poor’s parent company McGraw-Hill reported its receipt of a Wells notice from the U.S. Securities and Exchange Commission, warning of potential civil charges against the ratings agency for its role in the recent mortgage crisis.
According to CNN/Money, "the commission could fine the company for alleged securities violations related to a 2007 collateralized debt obligation deal that S&P rated. . . The CDO deal in question, known as Delphinus CDO 2007-1, was arranged by Mizuho International and Delaware Investments acted as the collateral manager. In 2007, S&P had a AAA rating on the security, which was backed largely by subprime mortgages."
McGraw-Hill was notified by the SEC on September 22 and, according to Financial Times, the move by the regulatory agency "marks the first time the SEC has sought to pursue charges against a ratings company in connection with its rating of a CDO, linked to pools of residential mortgages." S&P’s is also facing an ongoing investigation by the Department of Justice into its rating procedures.
The SEC’s action comes nearly two months after S&P’s downgraded the U.S. government’s credit rating.
As the SEC looks into possible charges against the company, The New York Times reports that the outcome is not clear-cut:
Standard & Poor’s and other rating agencies were not generally the architects of deals like Delphinus, but the AAA ratings they placed on parts of those deals were critical to the banks’ abilities to sell them to investors. S.& P. and other agencies made record profits placing ratings on mortgage securities like Delphinus, but they did not provide any sort of promises to investors that their ratings were accurate. If investigators at the S.E.C. or the Justice Department find that analysts at S.&P. intentionally gave out inaccurate ratings, that could be a violation of the law.
The news had an immediate effect on S&P’s and its parent company in one regard. Forbes reports of McGraw-Hill stock on Monday: "Shares slid 42 cents to $42.51 in afternoon trading. Earlier, the stock traded as low as $41.50."
See also, "Standard & Poor’s Sees Risk of U.S. Debt Default as Risk to U.S. Business," CorpCounsel, July 2011; and "The U.S. Credit-Rating Downgrade Will Keep In-House Lawyers Busy," CorpCounsel, August 2011.