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Business

S&P may face US lawsuit over mortgage bonds rating

Ratings agency Standard & Poor’s has said it is to be sued by the US government for its positive rating of mortgage bonds ahead of the 2008 financial crisis. S&P has denied any legal wrongdoing.

The ratings agency said that it had received warning of an impending civil lawsuit from the US Justice Department on Monday. S&P said it would be accused of fraudulently giving high ratings to some mortgage-backed securities.

In a statement S&P said the planned legal action was "entirely without factual or legal merit," promising a vigorous defense.

Alongside two other major credit ratings agencies - Moody's Investors Service and Fitch Ratings - S&P has been criticized for assigning top-notch "AAA" ratings to mortgage-backed securities, which combined multiple home loans into bundles sold to investors on the open market. When house buyers later defaulted on their loans, pushing the properties' values down, the market value of the securities dropped, helping to fuel the so-called 2008 financial crisis.

The rating's agency noted that it was not alone in its failure to predict the deteriorating conditions in the US mortgage market. "Regrettably, the breadth, depth and the effect of what ultimately occurred were greater than we - and virtually everyone else - predicted," S&P said.

It contended that a lawsuit would "disregard" the fact that it had used the same data as the rest of the markets and the US government which, prior to the crash, had publicly said the problems in the subprime mortgage market appeared to be limited.

S&P also said that it had downgraded a number of residential mortgage-backed securities ahead of other ratings agencies.

"With 20/20 hindsight, these strong actions proved insufficient - but they demonstrate that the DoJ [Department of Justice] would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith," S&P said.

Market repercussions

Shares in S&P's owner, the New-York based publishing and media group McGraw-Hill, fell 13 percent on Monday following news of the impending law suit. Moody's stock also dropped by 10.7 percent.

According to The Wall Street Journal the case could be filed as soon as this week. It would mark the first such action the US government has taken against a major rating agency linked to the crisis. It does not involve any criminal charges.

The US Justice Department has not commented on the issue.

ccp/msh (AFP, AP)