In May 2007, Standard & Poor’s confirmed its initial AAA ratings on $772m of a collateralized debt obligation known as Octonion I. Within 10 months, the Citigroup deal defaulted, costing investors and the bank almost all their money.
Bloomberg reports that the CDO, which repackaged mortgage-backed securities and other similar bundles of debt, was among dozens of transactions valued at tens of billions of dollars in 2007 that the ratings firm never should have blessed, the Justice Department said February 4th in a lawsuit filed in Los Angeles.
Octonion I underscores how inflated grades during the credit boom contributed to more than $2.1 trillion in losses at the world’s financial institutions after home-loan defaults soared and residential prices plummeted. The U.S. is seeking penalties against S&P and its New York-based parent, McGraw-Hill Cos., that may amount to more than $5bn, based on losses suffered by federally insured banks.
Bloomberg also reports that the U.S. government will prevail in its lawsuit accusing McGraw-Hill Cos. and its Standard & Poor’s unit of fraud, former Securities and Exchange Commission Chairman Arthur Levitt said.
'The government is going to win', Levitt said in an interview with Tom Keene on Bloomberg Radio. 'McGraw-Hill was foolish not to have made a settlement'.