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S&P may face SEC sanctions over CDO

Standard & Poor’s, the world’s largest provider of credit ratings, may face U.S. regulatory sanctions in connection with its rating of a $1.6 billion collateralized debt obligation in 2007.

The Securities and Exchange Commission’s Wells notice may lead to the agency’s first action against a ratings firm for giving top grades to mortgage-backed securities before they plummeted in value. McGraw-Hill, S&P’s parent company, said in a regulatory filing Monday that it received the notice Thursday that the SEC may seek penalties including disgorgement of fees related to a collateralized debt obligation known as Delphinus CDO 2007-1.

Delphinus was highlighted in a U.S. Senate panel’s report as a “striking example” of how banks and ratings firms branded ­mortgage-linked products safe even as the housing market worsened in 2007. S&P rated six tranches of Delphinus AAA in August 2007 and began downgrading the securities by the end of the year, according to the permanent subcommittee on investigations report released in April. By the end of 2008, they were rated as junk, the report said.

Ratings firms have been faulted by lawmakers, regulators and investors for fueling the 2008 credit crisis by giving inflated grades on debt linked to risky loans. The Dodd-Frank Act, passed in response to the crisis, required the SEC to set up an office to oversee raters including New York-based S&P and rivals Moody’s and Fitch Ratings.

Fitch, a unit of Paris-based Fimalac, has not received a Wells notice regarding the Delphinus CDO, said Daniel Noonan, a spokesman. Moody’s also has not received a notice about the deal, said Michael Adler, a spokesman for the New York-based rater.

A Wells notice is neither a formal allegation nor a finding of wrongdoing, McGraw-Hill said in its statement. S&P has been cooperating with the SEC and intends to continue to do so, the statement said.

CDOs are pools of assets, such as mortgage bonds packaged into new securities, in which interest payments on the underlying bonds or loans are used to pay investors.

— Bloomberg News



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