McGraw-Hill's S&P has until April for US suit response

McGraw-Hill Cos’s Standard & Poor’s unit and the Justice Department both want more time to prepare written arguments in the first federal court case against a ratings service for grades related to the credit crisis.

The government accused S&P on February 4 of deliberately misstating the risks of mortgage bonds, whose collapse helped trigger the credit crisis. A response was due March 6. S&P, citing the complexity of the case, yesterday won a federal judge’s permission to extend the deadline to April 22.

S&P sought more time to review and respond to the US complaint given the “length and breadth of its allegations,” it said in a filing in federal court in Santa Ana, California.

The government agreed as long as S&P consents to the Justice Department getting a similar extension for its reply to the ratings company’s response, according to the document. US District Judge David Carter granted S&P’s extension.

S&P is accused in the lawsuit of inflating ratings on mortgage-backed securities and collateralised debt obligations and the US may seek as much as $5 billion in damages. More than a dozen states followed with their own lawsuits while others are still investigating the company. Connecticut, Illinois and Mississippi had earlier filed lawsuits.

Financial institutions
S&P rated more than $2.8 trillion worth of residential mortgage-backed securities and almost $1.2 trillion worth of collateralised debt obligations from September 2004 to October 2007, according to the US complaint.

Federally insured financial institutions suffered $5 billion in losses on CDOs rated by S&P, the Justice Department said in a statement.

The collapse in value of securities that packaged home loans from the riskiest borrowers led to a credit seizure starting in 2007 that sent the world’s largest economy into its longest recession since 1933, as defaults soared and home values plummeted.

McGraw-Hill, which had net income of $867 million in the past four quarters, denied wrongdoing. S&P called the US and state lawsuits “meritless” and said its ratings reflected the company’s best judgments, according to a statement.

According to the US complaint, S&P falsely represented to investors that its credit ratings were objective, independent and uninfluenced by any conflicts of interests.

The company bent rating models to suit its business needs to the extent that one CDO analyst commented that loosening the measure of default risk for a certain security in 2006 “resulted in a loophole in S&P’s rating model big enough to drive a Mack truck through,” the US said.

Banks create collateralised-debt obligations by bundling bonds or loans into securities of varying risk and return. They pay ratings companies for the grades, which investors may use to meet regulatory requirements.