Feb. 22 (Bloomberg) -- Standard & Poor’s practices for grading commercial property bonds since the 2008 credit crisis are drawing scrutiny from Massachusetts authorities, according to three people with knowledge of the matter.
The scope of the probe by state Attorney General Martha Coakley extends beyond the securities and period that are the subject of a lawsuit brought by the U.S. Justice Department against New York-based McGraw-Hill Cos. and its S&P unit.
Coakley is looking into whether the world’s biggest credit-rating company lowered its standards to win business ranking commercial property bonds as the market recovered from the worst financial crisis since the Great Depression, said the people, who asked not to be identified because they’re not authorized to speak publicly about the case. Her office acknowledged conducting a probe of S&P earlier this month.
The Justice Department’s case focuses on deals from September 2004 to October 2007, accusing S&P and its parent of inflating ratings on bonds backed by home loans made to the riskiest borrowers, according to the complaint filed Feb. 4 in federal district court in Los Angeles. The U.S. seeks $5 billion in damages, equivalent to more than five years of profit at McGraw-Hill.
The probes from Coakley and New York Attorney General Eric Schneiderman threaten the ratings company with broader litigation after the U.S. was joined by 13 states and the District of Columbia in their lawsuits this month over S&P’s role in helping trigger the crisis that sent the world’s largest economy into its longest recession since 1933 as defaults soared and home values plummeted.
“Our office is engaged in our own related investigation into this matter and we are closely monitoring this lawsuit filed by other Attorneys General,” Brad Puffer, a spokesman for Coakley in Boston, said Feb. 5 in an e-mailed statement. “These are serious allegations and, as our previous action around mortgage-backed securities has shown, our office remains committed to holding accountable those who helped trigger the financial crisis and to preventing further harm.”
Jillian Fennimore, a spokeswoman for Coakley, declined to comment further. Ed Sweeney, a spokesman for S&P, declined to comment.
Schneiderman is investigating whether S&P, Moody’s Investors Service and Fitch Ratings violated a 2008 settlement that was reached with his predecessor Andrew Cuomo that resolved a state investigation into ratings, a person familiar with the matter told Bloomberg News on Feb. 8.
S&P was frozen out of the commercial-mortgage backed securities market for more than a year after pulling grades on a $1.5 billion offering from Goldman Sachs Group Inc. and Citigroup Inc. in July 2011, forcing underwriters to cancel the transaction five days after it was placed with investors.
At the time, S&P temporarily stopped rating new commercial-mortgage bonds, saying it had to review a potential conflict in its model. The following month, the company said the conflict had turned out not to be significant and would resume grading deals.
When S&P re-entered the market in October, Moody’s criticized the company for awarding investment grade ratings on a $1.5 offering from JPMorgan Chase & Co., saying the underlying loans did not “merit” the ranking.
Grading securities tied to debt on skyscrapers, hotels and shopping centers is one of the most lucrative businesses for ratings companies. The firms generally charge between $1 million and $2 million to grade a commercial mortgage bond, which bundles the loans into securities of varying risk, according to an October 2011 paper by Andrew Cohen, a researcher at the Federal Reserve.
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