McGraw Hill Financial Inc. said it agreed to pay $1.4 billion to settle government allegations that its Standard & Poor's ratings company doctored the credit ratings on billions of dollars of mortgage securities during the run-up to the financial crisis.
The announcement, which was expected, ends nearly three years of often bitter litigation that pitted the Justice Department and 19 state attorneys general, including California Atty. Gen. Kamala D. Harris, against the world's largest credit-rating company over its role in causing one of the worst financial calamities in history.
S&P said it settled the matter to "avoid the delay uncertainty, inconvenience, and expense of further litigation."
Under the terms of the deal, the Justice Department will get half the settlement amount, or $687.5 million, and the states, plus the District of Columbia, would get the other half, with California receiving the lion's share of $210 million, according an announcement this morning by California Atty. Gen. Kamala D. Harris. The bulk of California's payment would go to the state's two main public pension funds, the California Public Employees' Retirement System, and the California State Teachers' Retirement System, to settle claims over losses sustained on mortgage securities after relying on faulty S&P ratings.
Separately, S&P agreed to pay CalPERS an additional $125 million to settle claims brought by the pension fund over allegedly defective S&P ratings on three mortgage-related securities , bringing the total going to California to $335 million.
"S&P profited by misleading investors who trusted its ratings," Harris said in a news release. "California's public pension funds suffered significant losses due to S&P's failure to honestly and accurately disclose the risk of the very investments that caused an international economic recession. This settlement holds S&P accountable for financial losses caused by these misrepresentations and compensates our pension funds."
Atty. Gen. Eric H. Holder Jr. was exected to announce the full settlement, including a much-anticipated "statement of facts" about the case agreed to by S&P, at a news conference Tuesday morning.
The settlement is one more turn in the long and painful process of digging out of the financial crisis of 2008, which centered on the mortgage market and the type of mortgage-backed securities rated by S&P and rival Moody's Investor Services, a Moody's Corp. unit, and their smaller competitor, Fitch Ratings Inc.
As the housing market heated up in the mid-2000s, Wall Street banks rushed to market hundreds of billions of dollars worth of high-yielding, mortgage-related securities, each of which required a rating on their credit quality by one of the three firms that dominated the market.
Government investigations later faulted the raters, which are paid by the Wall Street firms whose bonds they rate, for conflicts of interests and said the companies lowered their credit standards to win new business. As the housing market faltered, the securities, many of them rated AAA, crashed in value, sending global financial markets into a tailspin.
The 2011 Financial Crisis Inquiry Commission called the rating companies "essential cogs in the wheel of financial destruction."
Already, financial institutions in the U.S. and Europe have agreed to pay more than $178 billion in total litigation costs stemming from the crisis, according to a December study by Boston Consulting Group, including high-profile settlements between government agencies and JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp.
Copyright © 2015, Los Angeles Times7:16 a.m. This article has been updated with details about the settlement with California.
7:08 a.m. This article has been updated with background information.
This article was previously published at 7 a.m.
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