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Th e M Rep o RT | 59 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET Department s&P seeking to settle ratings lawsuit Who rates the ratings firms? The Department of Justice, at least when fraud may be involved. a year-and-a-half-long legal case between the U.S. Depart- ment of Justice (DoJ) and Standard & Poor's Rating Services (S&P) could be over soon. According to the Wall Street Journal, S&P is preparing to resume talks with the DoJ in an effort to settle a $5 billion lawsuit filed by the government in February 2013. Citing sources close to the suit, the Journal reported that S&P is looking to negotiate a deal that could range from several hundred million to $1 billion. S&P is looking to resolve the charges leveled by the DoJ that the company, an arm of McGraw-Hill Financial Inc., inflated ratings for mortgage bonds before the Wall Street meltdown in 2008. This lapse in standards, the suit claims, was an at- tempt to increase fees from insurers that ended up cost- ing investors billions. The suit alleges that S&P "knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors" in collat- eralized debt obligations and securities backed by residential mortgages between September 2004 and October 2007. The suit also claims that S&P "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P's analytical judgment." According to the Journal, the lawsuit is the offshoot of an investigation by the federal government that dates back to at least 2010. While no one at S&P nor the DoJ has spoken on the record about the case recently, S&P did in the wake of the filing call the suit "entirely without factual or legal merit." Nevertheless, the company announced in 2013 that it had expected the suit, adding that it felt it was being unfairly punished by the government for not being able to foresee the coming financial crisis. According to a Reuters report at the time, S&P said its actions were "motivated by commercial considerations." While the expected S&P offer falls shy of what the DoJ is seeking, the Wall Street Journal reported that the ratings firm wants the matter over with, but without having to admit to wrongdoing. From the beginning, S&P officials shaken by the government's urging that the company admit wrongdoing have bristled at the idea that being forced to admit such a thing could leave the firm open to other lawsuits by investors. S&P is also contending with several state-level lawsuits over its actions and conduct during the financial crisis and is, according to the Journal, evaluating its strategies for settling these suits. Hensarling (R-Texas), chair- man of the committee. "Instead, Dodd-Frank actually enshrines 'too big to fail' into law." The report calls the Financial Stability Oversight Council (FSOC), created to manage the administration of Dodd-Frank, "unwieldy," and states that the FSOC has failed to live up to its statutory mis- sion to identify and mitigate systemic risk. The report also says that while the Office of Financial Research has made some progress in its mission to collect financial data to identify systemic risks, its progress has been hampered by poor data col- lection efforts that risk "impos- ing substantial costs in return for speculative benefits." More to the point of its title, the report asserts that propo- nents of Dodd-Frank have never offered an adequate, concrete explanation of how the orderly liquidation authority—which provides a process to quickly and efficiently liquidate a large, complex financial company that is close to failing—would actually end bailouts. The FDIC's strategy for implementing "single point of entry" provisions outlined in Title II of Dodd-Frank is, accord- ing to Republicans, "a recipe for future AIG-style bailouts." "Contrary to the claims of its proponents, Dodd-Frank leaves taxpayers exposed to the costs of resolving large, complex financial institutions," the report states. Hensarling says that Dodd-Frank "misses some obvious problems and creates new ones," especially where government-sponsored enterprises such as Fannie Mae and Freddie Mac are concerned. "Firms designated as 'financial market utilities' under Dodd-Frank," the report states, "are the next generation of GSEs." Moreover, Republicans charge, regulatory requirements imposed under Dodd-Frank create com- pliance burdens that distort the free market by making it harder for small-to-medium-sized finan- cial institutions to compete with larger firms, further entrenching "too big to fail." While Republicans on the Financial Services Committee plan to introduce legislation "to repeal Dodd-Frank's bailout fund and take other steps to end 'too big to fail' once and for all," according to Hensarling, the act's latter architect, Barney Frank, former Massachusetts Representative and FSC chair- man, testified at a congressional hearing to assess the impact of the Dodd-Frank Act four years later. Republicans are doubtlessly less than enthusiastic about what Frank has to say and make no effort to hide their distaste for what they consider a cumber- some piece of legislation. "Rather than institute market discipline and a clear rules-based regime, four years later," said Oversight and Investigations Subcommittee Chairman Patrick McHenry, "Dodd-Frank's failed policies have only worsened the risks within the financial system and recklessly handed financial regu- lators a blank check for taxpayer- funded bailouts." "In no way, shape or form does the Dodd-Frank Act end 'too big to fail; Instead, Dodd- Frank actually enshrines 'too big to fail' into law." — Jeb Hensarling (R-Texas)