Bernanke said at an August 2007 meeting of Fed board members that there “is an information fog” that “is very much associated with the loss of confidence in the credit-rating agencies,” according to transcripts released last month.

‘Worked Diligently’

S&P has also said that the Justice Department is “wrong” in saying its “ratings were motivated by commercial considerations and not issued in good faith.” It issued “extensive” downgrades in 2007 before rivals, had analysts who “worked diligently to keep up with an unprecedented, rapidly changing and increasingly volatile environment,” and competitors matched its ratings on all of the so-called collateralized debt obligations, which repackaged mortgage- backed securities and other similar bundles of debt, cited in the lawsuit.

Ed Sweeney, a spokesman for S&P in New York, declined to elaborate on the ratings firm’s statements.

Even before most of the declines in home prices, many pieces of CDOs such as Octonion I defaulted within months of getting S&P’s top grades as they were issued in 2007, according to the complaint and data compiled by Bloomberg. CDOs package assets such as mortgage bonds into new securities with varying risks.

2007 Warning

“It wasn’t just the character of the loans that was a problem, it was also the characters of the structures brought to market,” said Tavakoli, the Chicago consultant who has worked at banks including Merrill Lynch & Co. and Goldman Sachs Group Inc.

S&P’s CDO group enabled the boom to continue in 2007 by ignoring months of warnings and data from its RMBS group that their ratings, which it relied on in grading CDOs, were proving flawed, according to the complaint.

The group’s senior executives including Patrice Jordan and David Tesher often didn’t pass on that information to analysts responsible for CDOs created from mortgage-backed securities, the Justice Department said.

One example included an internal June 2007 report that found that the average ratio between the amount of mortgage delinquencies and investor protection on subprime RMBS slices rated BBB or lower exceeded a level that signaled downgrades were likely in the “near term,” according to the complaint.

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