(Bloomberg) — 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.
The $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 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.
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.
Financial sting
The company and regulators "settled this matter 'to avoid the delay, uncertainty, inconvenience, and expense of further litigation,'' Catherine Mathis, an S&P spokeswoman, said in a release. The settlements will be reflected in the company's 2014 full-year financial statements and fourth-quarter results that will be released on Feb. 12, the company said.
The settlement arguably delivers a greater financial sting to McGraw Hill than did last year's deals with the banks that admitted they misled investors about the quality of securities assembled from subprime loans. S&P's cash payout is equivalent to about a year and a half of profit for McGraw Hill.
By comparison, the majority of the Justice Department's $16.7 billion settlement with Bank of America represented a pledge that the bank would write down or forgive mortgage-holders debt; the bank's cash payout was $9.7 billion, or about 85 percent of its year-earlier profit. Also in 2014, Citigroup's $7 billion settlement with the Justice Department required it to pay out $3.8 billion in cash — roughly the equivalent of its second-quarter profit that year. Net income at McGraw Hill amounted to about $964 million last year, according to six analyst estimates compiled by Bloomberg.
In late 2012, the Justice Department began settlement talks with S&P over the company's ratings of the subprime mortgage-backed bonds. The discussions were derailed when S&P refused to admit wrongdoing, according to a person familiar with the talks.
In February 2013, the government sued S&P, alleging it awarded investment-grade ratings to those securities in a bid to win business and accused it of lying about its rankings being free from conflicts of interest.
Geithner called
In court filings, Harold W. McGraw III, chairman of McGraw Hill, said that Timothy Geithner, who was Treasury secretary at the time, had called him days after S&P downgraded the U.S. debt in August 2011 and told him the company would be held accountable for its action.
