Standard & Poor’s news release responding to the government’s lawsuit over its mortgage-bond grades complained that the ratings company is being sued for “not predicting full magnitude of housing downturn despite failure of virtually everyone to do so.”

That’s far from an accurate representation of the case brought this week by the Justice Department, based on allegations in the government complaint.

“S&P is basically throwing a red herring out there,” Janet Tavakoli, founder of Chicago-based consulting firm Tavakoli Structured Finance Inc., said yesterday in a telephone interview. “That’s not what they’re being held accountable for. Nobody was asking them to predict the future. They were asking them to look at the risks in front of them and apply prudent and reasonable analysis.”

Federal prosecutors allege S&P failed to adjust its analytical models or take other steps it knew were necessary to accurately reflect the risks of the securities. The claims are tied to whether the company, a unit of New York-based McGraw-Hill Cos., accurately represented the care it took in providing credit grades and avoiding conflicts, not how incorrect its ratings later proved. E-mails and other internal documents discussed how the issuers might react to tougher standards by taking their business elsewhere.

58 Allegations

The complaint, filed in federal court in Los Angeles on Feb. 4, includes at least 58 examples of S&P executives ignoring internal warnings from analysts and others, dismissing relevant data, taking steps to appease issuers or acknowledging how pressure from banks could lessen the quality of its grades or delay downgrades.

Allegations in the civil lawsuit against S&P and its parent come after reports from the Financial Crisis Inquiry Commission and a Senate panel said that inflated mortgage-bond grades from the firm, Moody’s Investors Service and Fitch Ratings helped fuel the lending practices that let the housing bubble get so big before it burst.

Prices in 20 large metropolitan areas more than doubled from the start of 2000 through mid-2006 before tumbling 35 percent to a bottom last year, S&P/Case-Shiller index data show. As defaults soared and banks failed, the U.S. entered a credit crisis and its longest recession since 1933, from which it has yet to recover 3.23 million of the 8.74 million jobs lost.

642,000 Loans

At one point during the boom, S&P worked on an update to its model used in assessing residential mortgage-backed securities, or RMBS. Instead of the version, known as LEVELS 6.0, being introduced at the start of 2005 as planned, it was never released, according to the complaint.