S&P parent seeks to have lawsuit against rating agency tossed, calls US claims a 'stretch'

LOS ANGELES, Calif. – The parent company of Standard & Poor’s wants a federal judge to dismiss a U.S. government lawsuit that claims the ratings agency gave falsely high ratings to mortgage investments that helped trigger the financial crisis.

Attorneys for McGraw-Hill Cos. Inc. delivered their arguments in documents filed Monday in U.S. District Court in California.

The motion asserts that the government’s complaint against S&P is “a stretch,” noting that other agencies issued ratings identical to S&P.

It also argues that the ratings firm’s inability to predict the extent of the financial meltdown was a lack of prescience — not fraud. It notes the crisis was something that the Federal Reserve, U.S. Treasury and Wall Street also failed to see coming.

The government filed the civil lawsuit against New York-based McGraw-Hill in February and aims to seek billions in damages.

The Justice Department claims S&P knowingly inflated its ratings because it wanted to earn more business from its lender clients 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 S&P gave to complex real-estate investments known as mortgage-backed securities and collateralized debt obligations, or CDOs, the lawsuit alleges.

High ratings from S&P and the two other main credit rating agencies — Fitch and Moody’s — 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.

But in its filing Monday, McGraw-Hill argues that U.S. District Court Judge David O. Carter should dismiss the case because the government failed to show S&P intended to defraud investors in CDOs.

In one example, the company contends that two of S&P’s “supposed victims,” Citibank and Bank of America, were creating and selling the CDOs that the S&P was rating.

“In other words, the complaint charges S&P with intending to defraud these financial institutions about the likely performance of their own products,” the filing said.

McGraw-Hill also makes the point that it could not have been fraudulent for S&P to continue to rely on its ratings for residential mortgage-backed securities if the firm continued to update its ratings “in good faith.”

The claim against S&P is the Obama administration’s most aggressive action to date against those deemed responsible for contributing to the worst financial crisis since the Great Depression. Its follows years of criticism that the government had failed to do enough.

Shares of McGraw-Hill ended regular trading up 15 cents at $52. The stock is down about 5 per cent this year.