Lisa Madigan sues S&P for role in housing market meltdown
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 its revenue and market share,” the Attorney General’s office said Wednesday in a written announcement of the suit.
The suit alleges S&P “ignored the increasing risks posed by mortgage-backed securities” and instead assigned investment pools ratings that favorable to its client base and its own profits, the statement said.
“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 emails and conversations among S&P employees before the housing crash which Madigan claims demonstrate the company misrepresented its ratings as objective and independent. In an April 2007 exchange via instant message, workers discussing S&P ratings compared to the actual risk involved, said investments “could be structured by cows and we would rate it.”
Investors relied on S&P ratings “because they were historically rooted in the agency’s purported independence and objectivity,” Madigan’s statement said. 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, quotes testimony to Congress by a former S&P managing director who said “profits were running the show” and said ratings were given to risky investments “to help drive profit margins for clients,” the statement said.
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 is not the first time Madigan has gone after financial misconduct.
She sued lender Countrywide, leading to in a nationwide $8.7 billion settlement over predatory lending practices in 2008. She also reached a $39.5 million settlement with Wells Fargo over what she called the deceptive marketing of “extremely risky loans” called Pay Option ARMs. In 2006, Illinois received $10 million as part of a $325 billion multi-state settlement with Ameriquest over “deceptive sales of predatory subprime mortgages,” the release said.
Spokesman for Standard & Poor’s did not immediately respond to a request for comment.