McGraw-Hill Cos. Inc., which owns Standard & Poor’s, said it received a Wells Notice from the Securities and Exchange Commission (SEC) staff on Thursday explaining civil legal action may be recommended against the institution. The reason behind the recommendation is an issue with a particular 2007 mortgage investment, known as a collateralized debt offering.
S&P Too Lenient with CDOs
Reports say the notice S&P received from the SEC explains the agency is accused of being lax in rating collateralized debt obligations, also known as CDOs.
CDOs are securities that are tied to multiple underlying mortgage loans and generally gain value when a borrower repays. However, if a borrower defaults on the loan, the CDO investor will lose money.
Soured CDOs are largely to blame for the financial crisis of 2008. Many investment firms knew the mortgage loans were provided to borrowers who would not be able to repay and that the CDO investments would eventually go south.
Ratings agencies like S&P were also said to know CDOs had become poor investments but still gave them high ratings, encouraging investors to hop on board without full understanding of the risk.
SEC May Seek Penalties
According to the Wells Notice, the SEC staff may recommend the commission seek civil money penalties, disgorgement of fees or other actions against S&P.
The ratings agency has already been under fire for its downgrade of the U.S. debt, and has been scrutinized for several bad calls made leading up to the financial crisis and economic meltdown that began in 2008.
As for the notice issued by the SEC, now that S&P has received it, the commission’s staff will likely give the company an opportunity to make the case for why charges are unwarranted. If S&P makes a good case, charges may never be filed.
S&P said it has been cooperating with the commission and is planning to continue cooperating on the matter.
