The U.S. Securities and Exchange Commission’s potential suspension of Standard & Poor’s from grading commercial-mortgage backed bonds would threaten a practice regulators have blamed for fueling the credit crisis.
The SEC has been investigating whether the firm bent ratings criteria to win business in 2011, according to a person with knowledge of the matter, who asked not to be named because discussions between the agency and S&P about a possible suspension are private. In a practice known as ratings shopping, banks often seek assessments from several credit graders and choose the ones that give the most favorable views when assembling asset-backed bond deals linked to everything from auto loans to mortgages.
“Even temporarily taking away a slice of S&P’s business would send a powerful message to the rest of the market that the SEC is serious about attempting to address ratings shopping,” said Jeffrey Manns, an associate professor of law at George Washington University in Washington.
A suspension would be the SEC’s toughest punishment yet against one of the three-biggest credit raters, which have been blamed for fueling the 2008 financial crisis by giving top ratings to securities that later soured. S&P’s parent, New York- based McGraw Hill Financial Inc., disclosed in July that SEC investigators were pursuing an enforcement action tied to CMBS deals it rated in 2011.
Contentious Transaction
Catherine Mathis, a spokeswoman for McGraw Hill, declined to comment, as did John Nester, a spokesman for the SEC.
“As we stated in our third-quarter earnings, we’re in active discussions with the SEC to resolve matters that are pending there,” Chief Executive Officer Douglas Peterson said at an investor conference yesterday.
The deal that triggered the turmoil at S&P began with controversy. S&P stamped AAA ratings on parts of a deal that offered investors less of a cushion against losses than the ratings firm had allowed on similar transactions. That raised concern that S&P was caving in to issuers to win business and leading bond buyers to question the ratings company’s methodology. Analysts led by Barbara Duka, who was the head of the CMBS group at the time, held a conference call to field questions from investors on how they were assessing risks of the deal.
Revised Criteria
Goldman Sachs Group Inc. and Citigroup Inc. subsequently rejiggered the transaction to boost investor protections, increasing the buffer that protected AAA securities from loan defaults by adding to the amount of lower-ranked debt that was first to absorb losses. The banks then placed the deal with investors, only to pull it a week later when S&P withdrew its rating, citing a discrepancy in its models.