Bloomberg contributor Jonathan Weil says that the U.S. Justice Department made some peculiar allegations in its lawsuit this week against S&P and its parent, McGraw-Hill Cos. According to the government, Citigroup was defrauded by S&P credit ratings on subprime mortgage bonds that Citigroup itself created and sold. Bank of America, too, allegedly was defrauded by S&P in the same way.
If this doesn’t make sense, that’s the point. The notion is far-fetched. No wonder S&P wouldn’t agree to a settlement and told the government to see it in court.
Here’s the gist. Near the end of its 119-page complaint, the Justice Department listed about two-dozen collateralized-debt obligations issued in 2007 as examples where S&P allegedly defrauded banks and credit unions. It was important that the Justice Department be able to identify such lenders as investors, because it’s suing S&P under a 1989 statute that covers frauds against federally insured financial institutions.
Under the government’s theory, Citigroup and Bank of America paid S&P for ratings that convinced the banks their own CDO offal was rock-solid. And because S&P deceived them into thinking the best of their own rubbish, these banks and other lenders suffered more than $5bn of investment losses, according to the suit.
Hit the link below to access the complete Bloomberg article:
Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
Weil was a reporter for The Wall Street Journal from 1997 to 2006, and before that at the Arkansas Democrat-Gazette in Little Rock. He grew up in Hollywood, Fla., and has a bachelor's degree from the University of Colorado at Boulder and a law degree from Southern Methodist University.
image: © Brian Fitzgerald