The mortgage crisis that devastated the Arizona economy was made far worse because of misleading financial claims made by Standard & Poor’s, according to a lawsuit filed Tuesday by the Arizona Attorney General’s Office.
Arizona’s Attorney General’s Office joined federal and state enforcers in filing actions against Standard and Poor’s for alleged misconduct involving structured finance securities backed by subprime mortgages that were at the heart of the nation’s financial crisis. Arizona is suing under the Arizona Consumer Fraud Act.
The AG’s Office believes that the evidence will show that S&P issued inflated ratings they knew were false and as a result, Arizona’s economy was substantially harmed.”
The complaint alleges that despite S&P’s repeated statements emphasizing its independence and objectivity, S&P allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients, and knowingly assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks.
This alleged misconduct began as early as 2001, became particularly acute between 2004 and 2007, and continued as recently as 2011.
Structured finance securities backed by subprime mortgages were at the center of the financial crisis. These financial products, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.
The enforcement action seeks a court order to stop S&P from making misrepresentations to the public; to change the way the company does business, and to obtain awards for civil penalties, as well as attorneys’ fees and costs.
The complaint filed in Maricopa County Superior Court, alleges that investors and other market participants, such as state regulators, relied on S&P to fulfill its promise of independence and objectivity. Instead, S&P adjusted its analytical models for rating residential mortgage-backed securities and collateral debt obligations to allow it to assign as many “AAA” ratings as possible, allowing it to earn additional revenue from its investment banking clients. .
Further, the complaint alleges that S&P’s monitoring, or surveillance, of previously rated RMBS and CDOs, was also affected by revenue considerations. In particular, the complaint alleges, S&P delayed taking rating actions on impaired RMBS and continued rating new CDOs even after it determined that the security’s underlying collateral was impaired, because it wanted to continue to earn lucrative fees.
The congressionally appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis “could not have happened” without ratings agencies such as S&P.
Other states taking action today are: Arkansas, California, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, and Washington.