SEC mulls charges against S&P in CDO case

U.S. regulators may charge Standard & Poor's with violating federal securities laws when it gave top ratings in 2007 to a repackaged mortgage bond that soon tanked.

Securities and Exchange Commission action against S&P would be one of the first by the commission against a major rating agency in the wake of the financial crisis.

S&P parent McGraw-Hill Cos Inc (MHP.N) said it might have to pay civil penalties to the SEC. McGraw-Hill shares were down 2.2 percent in morning trading.

The SEC investigation comes as McGraw-Hill prepares to split into two publicly traded companies, one holding S&P and market information services, and the other holding the company's textbook publishing business.

Institutional shareholders, led by Jana Partners, have pushed the conglomerate to further break itself up, completely severing S&P's ratings business from its analysis and information operations.

McGraw-Hill said on Monday that the SEC had sent a Wells notice signaling that commission staff might recommend action against S&P. The notice was received September 22.

At issue is a 2007 collateralized debt obligation known as "Delphinus CDO 2007-1." A Senate subcommittee report in April cited the deal as a "striking example" of a CDO moving from top ratings to junk in a matter of months.

Wheels of Justice Grind

S&P issued the CDO ratings in question at a time when the credit boom that had lifted mortgage lending and house prices was already collapsing, said Janet Tavakoli, a structured finance expert at Tavakoli Structured Finance in Chicago.

S&P ratings covered at least $947 million of liabilities in the Delphinus CDO, which was originated August 2, 2007. Within five months the CDO was in technical default, according to a notice S&P issued at the time. S&P's AAA ratings on the bonds were marked down to junk by the end of 2008.

"There is no excuse for rating these deals in the way they were," said Tavakoli.

She said "it is a shame" that the SEC investigations are still going on four years after the events in question and months after the Senate subcommittee report came out. "The wheels of justice move much too slowly," she said.

S&P is facing other regulatory pressure as well. Last month a source said the U.S. Justice Department was investigating S&P and Moody's Investors Service actions on mortgage securities.

S&P's failures with structured finance ratings were recently cited by Washington politicians as reason to doubt the agency's decision in August to cut its rating on U.S. government debt from AAA to AA-plus. No other major rating agency has downgraded U.S. government debt.

[Source: By David Henry, Reuters, NY, 26Sep11]

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