The Securities and Exchange Commission (SEC) has notified Standard & Poor’s that civil charges may be filed against the credit-ratings firm for its 2007 grading of a high-risk securities deal.

 

The warning represents the first time the SEC has put a credit-ratings agency on notice for actions that helped create the financial crisis last decade.

 

At issue for S&P is its 2007 rating of Delphinus CDO 2007-1, a collateralized debt obligation (CDO) that was linked to the hedge fund Magnetar, which created and then bet against CDos, thus helping fuel the housing bubble. The CDO was arranged by Mizuho International PLC, a unit of Japan's Mizuho Financial Group Inc.

 

According to ProPublica, the SEC may fault S&P for publishing inaccurate ratings of investment deals like Delphinus because it was paid by the very same firms it was impartially analyzing, supposedly. Because S&P gave a high rating to Delphinus, investors were encouraged to put money into it, when in fact several assets in the CDO were replaced at the last minute that made it more risky.

-Noel Brinkerhoff, David Wallechinsky

 

In a First, SEC Warns Rating Agency It May Bring Financial Crisis Lawsuit (by Marian Wang, ProPublica)

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (by Jesse Eisinger and Jake Bernstein, ProPublica)

S&P Gives Higher Rating to Sub-Prime Mortgages than to U.S. Bonds (by Noel Brinkerhoff, AllGov)

Exhibits Relating to Wall Street and the Financial Crisis: The Role of the Credit Rating Agencies (Senate Subcommittee on Investigations) (pdf)