S&P Ends Legal Woes Paying $1.5 Billion Fine To U.S., States

Standard & Poor’s $1.5 billion settlement with the U.S. Justice Department, more than a dozen states and the biggest U.S. pension fund today will let the world’s biggest rating company move beyond a bruising legal battle, at a steep cost.

S&P, a unit of McGraw Hill Financial Inc., will pay more than a year’s profit to settle suits that it inflated ratings on subprime-mortgage bonds at the center of the 2008 financial crisis. S&P sealed the deal without admitting wrongdoing. Ending the costly legal battle will help the company close a profit gap with its biggest competitor, Moody’s Corp.

A $1.375 billion settlement to be split evenly with the Justice Department and 19 states and the District of Columbia caps a rancorous two-year court battle during which S&P accused the Justice Department of cracking down unfairly on the company after its 2011 decision to downgrade U.S. sovereign debt to AA+ from AAA.

S&P reached a separate $125 million settlement with the California Public Employees Retirement System, or Calpers, to resolve claims over three structured investment vehicles.

S&P was the only credit rater sued by the Justice Department, even though its competitors also issued top ratings for similar subprime-backed securities. The Justice Department has denied there was any connection between the downgrade and the lawsuit.

‘Major Harm’

“The company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Eric Holder in prepared remarks. “While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

The agreement will require S&P to acknowledge in a statement that mortgage-backed securities it rated leading up to the financial crisis were becoming increasingly risky, Bloomberg News reported yesterday, citing a person familiar with the matter. S&P will acknowledge that it elected not to downgrade those securities “at least partly due to business considerations,” said the person.