WASHINGTON — The Securities and Exchange Commission is considering taking civil action against Standard & Poor's for its rating of a 2007 mortgage debt offering. Such action could be just the first shot in a legal assault against the major credit rating agencies.
The three major agencies — S&P, Moody's Investors Service and Fitch Ratings — gave high ratings to worthless mortgage investments that contributed to the 2008 financial crisis.
The SEC's focus is on S&P's rating of a 2007 collateralized debt offering, or CDO. CDOs are securities that contain many underlying mortgage loans.
A CDO generally gains in value if borrowers repay. But if they default, a CDO loses value. Soured CDOs have been blamed for deepening the 2008 financial crisis. And the big ratings agencies have been accused of being lax in rating CDOs.
If the SEC charges S&P with violating securities laws, it would mark the first time it has brought an enforcement action against a top rating agency.
New York-based McGraw-Hill Cos., which owns Standard & Poor's Ratings Services, said Monday in a regulatory filing that the SEC had told the company it's considering recommending that the agency act. The SEC's staff said it may recommend to the five SEC commissioners that they seek a civil fine and restitution.
The formal notice from the SEC staff gives S&P a chance to make a case that there's no basis for charges. S&P said it has been cooperating with the SEC and will continue to do so.
"It's a dark cloud on the horizon because this could be the first of many," said Anthony Sabino, a law professor at St. John's University in New York.
The SEC has charged several securities firms over their sales of complex mortgage investments. Last year, Goldman Sachs paid $550 million to settle fraud charges — the largest penalty against a Wall Street firm.
Before the financial crisis erupted, the three big rating agencies gave AAA ratings to trillions of dollars in securities linked to high-risk mortgages. Once home loan delinquencies soared and the housing market went bust, so did investments.
New SEC rules require the agencies to provide more details about how they determine each rating.