WASHINGTON – Jan. 22, 2015 – Securities and Exchange Commission (SEC) Chair Mary Jo White banned the world's largest credit rater, Standard & Poor's, from a large part of the mortgage market for one year.
In the toughest action since the mortgage crisis that nearly collapsed the banks, S&P has agreed to a year-long ban from rating a segment of the commercial mortgage-backed securities market (CMBS) because of ratings it issued in 2011 that regulators say were misleading.
The suspension is part of a settlement with the SEC as well as the attorney generals of New York and Massachusetts, and is tied to $1.5 billion worth of CMBS that S&P graded in early 2011.
S&P pulled the ratings a few months later, saying it had to review a potential problem in its models – causing market disruptions. That prompted an investigation by the SEC and the two AGs, which discovered that S&P had departed from its published criteria and went with assumptions that were less conservative than advertised.
"In the wake of the housing crisis and the collapse of the global economy, credit agencies like S&P promised not to contribute to another bubble by inflating the ratings on products they were paid to evaluate," New York Attorney General Eric Schneiderman said in a statement. "Unfortunately, S&P broke that promise in 2011, lying to investors about their profits and market share."
Specifically, the SEC banned S&P from rating new U.S. conduit-fusion CMBS transactions until Jan. 21, 2016. These are securities backed by pools of loans secured by commercial real estate, such as mortgages for shopping malls or skyscrapers. They include a financial intermediary, often a bank, that acts as a link between the lender and the investor.
S&P, a unit of publishing house McGraw Hill, will also pay close to $77 million in fines, including $12 million to New York and $7 million to Massachusetts.
In total, the SEC issued three proceedings against S&P related to the 2011 bonds as well as the rating agency's effort to get back into the market in 2012, after it had pulled the faulty ratings.
S&P "made certain admissions" regarding the first order tied to the misrepresentation of the 2011 bonds, the SEC said.
White's mission, when she took the office in 2013, was to not allow companies to settle without admitting wrongdoing – a practice that had come under scrutiny in the courts.
The SEC also found that S&P sought to mislead clients and investors when it sought to re-enter the CMBS market in mid-2012 by overhauling its ratings criteria.
"To illustrate the relative conservatism of its new criteria, S&P published a false and misleading study purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress," the SEC said.
In reality, the models were never tested against the severe losses of the Great Depression.
The misleading nature of the study had the original author concerned that he could find himself "sit(ting) in front of (the) Department of Justice or the SEC," the SEC said. S&P didn't admit or deny that it sought to mislead clients with the study, but it agreed to correct how it described its ratings criteria.
S&P, Moody's and Fitch were all criticized following the financial crisis for issuing ratings favorable to the banks that were paying for them in order to make the sometimes junky bonds they were selling more appealing.
Source: USA TODAY, Kaja Whitehouse
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