The California Public Employees’ Retirement System (CalPERS) is poised to receive about US$301 million in damages from Standard & Poor’s (S&P) and parent company McGraw-Hill Financial, the result of settlements in cases against S&P that stemmed from its rating of mortgage-backed and other securities prior to the financial crisis.
The settlement from a suit filed by the Department of Justice, 19 states and the District of Columbia will send about US$176 million to CalPERS. A separate settlement of CalPERS’ individual suit will give the fund approximately US$125 million.
“This money belongs to our members and will be put back to work to ensure their long-term retirement security,” says CalPERS CEO Anne Stausboll.
Read: CalPERS to recover millions in Bank of America settlement
Under the terms of the settlement, which is not subject to court approval, S&P will pay US$687.5 million to the Department of Justice (DOJ) as well as US$687.5 million to the states and the District of Columbia.
The agreement resolves the lawsuits by the DOJ and the states that allege that investors incurred substantial losses on residential mortgage-backed securities and collateralized debt obligations for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.
“As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business,” says U.S. Attorney General Eric Holder. “While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”
Read: The financial crisis: Timeline
S&P has also agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States. The credit rating agency downgraded long-term U.S. debt to AA+ from AAA in August 2011.
This settlement resolves charges against S&P in CalPERS’ individual suit for losses CalPERS sustained from investments in three structured investment vehicles that also collapsed during the financial crisis. However, it does not resolve the same charges against Moody’s Investors Service in that case.
CalPERS has recovered approximately US$900 million, to date, from settlements related to investment losses sustained during the financial crisis.
Also read: