Credit rating firm Standard & Poor’s will pay $21.5 million to North Carolina for controversial Wall Street practices that are blamed for contributing to a global financial meltdown in 2008.
North Carolina’s portion is part of a $1.38 billion national settlement with the U.S. Justice Department and attorneys general in 19 states as well as the District of Columbia.
Tuesday’s announcement comes after months of negotiations prompted by the Justice Department’s demand that S&P pay $5 billion. The settlement represents less than S&P’s $2.27 billion revenue in 2013.
In federal and state lawsuits, officials had accused S&P of inflating ratings of risky mortgage investments to keep clients happy, thereby contributing to the financial crisis that engulfed world economies seven years ago.
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“Good ratings were for sale,” N.C. Attorney General Roy Cooper said Tuesday in a news conference in Raleigh. “This deceit cost North Carolina jobs and income.”
The announcement by Cooper, an expected Democratic gubernatorial contender in 2016, was praised by Gov. Pat McCrory, a Republican.
“This good news allows us to incorporate an additional $21.5 million in our $20 billion budget recommendations,” McCrory said in a statement.
Cooper said internal documents produced during the 2-year lawsuit revealed that, under a pretense of objectivity, S&P inflated ratings of risky investments between 2001 and 2011 as part of a strategy to generate more business and expand market share.
With just three employees in North Carolina, S&P logged more than $41 million in earnings from its business activities in the state in 2012, the AG’s lawsuit said, saying it was a typical year financially for the Wall Street firm.
In one email exchange cited by the Justice Department, an S&P analyst quipped with a fellow analyst about appraising high-risk financial instruments: “It could be structured by cows and we would rate it.”
In another example, S&P assigned an AAA rating to a security issued by Goldman Sachs that became nearly worthless within a few months.
The episode led the Securities and Exchange Commission to sue Goldman for securities fraud in 2010, resulting in Goldman paying a $550 million penalty that year.
S&P’s parent, McGraw Hill Financial, was prepared to defend itself against the federal and state lawsuits, and said the company violated no laws. Cooper said the settlement averted “years and years and years” of litigation.
“The settlement contains no findings of violations of law by the Company, S&P Financial Services or S&P Ratings,” McGraw Hill said in a statement.
Under the settlement, S&P will pay $687.5 million to the Justice Department and $687.5 million to the states. Many states settled for $21.5 million, but several will receive more, and California will get $210 million.
S&P reached a separate settlement with California Public Employees’ Retirement System, agreeing to pay the public pension fund $125 million.
Two other ratings firms – Fitch Ratings and Moody’s Investors Service – are not part of the federal and state lawsuits, but Cooper said the ratings industry remains under investigation for its role in helping trigger a deep recession.
North Carolina’s $21.5 million is a fraction of the more than $300 million the state received as part of a national mortgage fraud settlement in 2012. That award helped establish the AG’s Financial Fraud Unit, which worked on the S&P case.
About $2.15 million of North Carolina’s settlement is a fine to be directed to public schools; the disposition of the remaining $19.4 million is at the discretion of the state legislature.