X

Standard & Poor’s is Banned from CMBS for One Year

The largest credit rater in the world, Standard & Poor’s (S&P), has been banned from a significant part of the mortgage market for one full year by Mary Jo White, chairwoman with the Securities and Exchange, based on the rater’s contribution to the financial crisis.

The ban is part of a settlement with New York and Massachusetts’ attorney generals but also the SEC. The mortgage crisis almost caused banks to collapse and since that time, this is the most severe action taken. The ban is for a very specific segment, Commercial Mortgage Backed Securities Market (CMBS) because regulators say the 2011 ratings made by the S&P were misleading. That year, the S&P graded $1.5 billion of CMBS.

Just a few months after posting the ratings in 2011, they were pulled by the S&P that claimed to have found a potential problem with the models used that created disruptions in the market. It was that action that prompted the two attorney generals and the SEC to start an investigation in which evidence was found that S&P did not follow published criteria but instead chose to go with less conservative assumptions.

Following the housing crisis, as well as the collapse of global economy, S&P along with other credit agencies have vowed there would be no contribution to anything that would inflate ratings on products they evaluate and get paid for. As stated by Eric Schneiderman, Attorney General for New York, in 2011, S&P went back on their promise by lying to investors about their market share and profits.

With this ban, S&P is not allowed to rate new US conduit-fusion CMBS transactions on securities backed by commercial real estate and numerous loans to include skyscraper and shopping mall mortgages.

Standard & Poor’s, which is associated with the huge publishing house of McGraw Hill, will also be required to pay nearly $77 million in fines. As part of this are $7 million to the state of Massachusetts and $12 million to New York. Overall, three proceedings were issued by the SEC in connection with the 2011 bonds and S&Ps effort to reenter the market in 2011 after the incorrect ratings were pulled.

The SEC stated that certain admissions were made by S&P specific to the 2011 misrepresentation of bonds. After taking office in 2013, White wanted to stop companies from agreeing to settlements that did not include an admission of wrongdoing. While many people fully supported this practice, it was heavily scrutinized in courts.

Although S&P did not admit nor deny clients had been misled, it did agree the description of its rating criteria would be corrected. In addition to this, the SEC tried to get S&P on failures for internal controls in surveillance of securities backed with residential mortgages, citing that breakdowns had been allowed as to how ratings were watched.

Separate action has been taken by the SEC against Barbara Duka, former commercial mortgage chief with S&P, stating she pushed for ratings criteria to be more issuer friendly. That case will be scheduled to go before an administrative law judge even though Duka wants to stand before a federal judge instead.

Categories: Business
Adam Kreller:
Related Post