The department has told S&P it intends to focus on the firm’s grading of certain mortgage bonds from 2007, according to the company.
These ratings have drawn scrutiny because agencies issued top grades to securities tied to shoddy residential mortgages, making them appear safe for investors. When the housing bubble burst and homeowners began defaulting on their loans, these financial products became worthless. The resulting losses on Wall Street nearly took down the entire financial system.
The Justice Department and S&P attempted to reach a settlement, but talks broke down, according to two people familiar with the matter. A lawsuit may be filed as soon as this week, and several state attorneys general are expected to join the case, the people said.
Another person close to the case said the lawsuit is likely to be filed in Los Angeles, one of the centers of the housing bust.
These people spoke on the condition of anonymity because the lawsuit has not yet been filed.
Without a copy of the lawsuit, it is hard to say what kind of case the Justice Department has built. The agency has chosen to file a civil suit, rather than a criminal case that could potentially put executives behind bars.
For some critics of the department, a civil case is not good enough.
“It seems the Justice Department is trying to sue the country’s way out of the fiscal crisis instead of bringing cases that might have a real deterrent effect,” Sen. Charles E. Grassley (R-Iowa), a frequent critic of how the department has handled Wall Street prosecutions, said in a statement. “Most civil suits are simply the cost of doing business and aren’t enough. Unfortunately, this appears to be another instance of the civil case-only, ‘too big to jail’ mentality at the Justice Department.”
The Justice Department declined to comment on the news, which was reported by the Wall Street Journal on Monday afternoon.
S&P, the country’s biggest ratings agency, said in a statement that the government’s case is “without factual or legal merit.”
“It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market,” the statement said.
S&P’s response appeared to outline the company’s central defense — that it was not the only ratings agency missing the picture and that it downgraded a number of securities ahead of the crisis.
For instance, the company said it downgraded 400 securities tied to residential mortgages as early as 2006, “more than in any prior year in history.”