Lisa Madigan sues S&P for role in housing market meltdown

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Illinois Attorney General Lisa Madigan

Updated: January 26, 2012 2:17AM

Illinois Attorney General Lisa Madigan has filed a lawsuit against Standard & Poor’s claiming the credit ratings agency fraudulently gave high ratings to risky mortgage-backed investments in the years prior to the 2008 housing market crash.

The suit, filed Wednesday in Cook County Circuit Court, alleged that S&P “compromised its independence” by giving its highest ratings to “unworthy, risky investments as a corporate strategy to increase its revenue and market share,” the attorney general’s office said Wednesday in a written announcement of the suit.

The suit alleges S&P “ignored the increasing risks posed by mortgage-backed securities” and instead assigned ratings that were favorable to its client base and its own profits, the statement said.

“Publicly, S&P took every opportunity to proclaim their analyses and ratings as independent, objective and free from its desire for revenue,” Madigan said. “Yet privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue. The mortgage-backed securities that helped our market soar — and ultimately crash — could not have been purchased by most investors without S&P’s seal of approval.”

In response to the suit, Standard & Poor’s spokesman David Wargin said: “This case is without merit and we will defend ourselves vigorously.”

The suit cites emails and conversations among S&P employees before the housing crash, which Madigan claims demonstrate the company misrepresented its ratings as objective and independent. In an April 2007 exchange via instant message, workers discussing S&P ratings compared to the actual risk involved, said investments “could be structured by cows and we would rate it.”

Investors relied on S&P ratings “because they were historically rooted in the agency’s purported independence and objectivity,” Madigan’s statement said. S&P’s internal code of conduct states its goal is to “promote investor protection by safeguarding the integrity of the rating process.”