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February 4, 2015

LA Times: Road to S&P settlement began with Jerry Brown chat, novel legal strategy

“Two Justice Department lawyers leading an effort to hold financial firms accountable for the mortgage-fed debacle that fueled the Great Recession stopped in to talk strategy in mid-2009 with Jerry Brown, then California’s attorney general.

“What are we going to do about the ratings agencies? What about them?” Brown asked the pair, Tony West and Geoffrey Graber.

“And when Jerry Brown left the room,” Graber recalled later, “Tony looked at me and said, ‘I really want to look at the ratings agencies.'”

“That conversation led to an unusual legal strategy and, ultimately, to the first civil lawsuit blaming a major ratings company for contributing to the 2008 financial crisis and exacerbating the recession.

“On Tuesday, the work came to fruition with a record settlement of nearly $1.4 billion with Standard & Poor’s Financial Services over allegations that the world’s largest ratings company misled investors with overly rosy ratings on securities backed by some of the riskiest subprime mortgages and other assets created in the housing boom.

“The agreement with S&P and its parent company, McGraw Hill Financial Inc., ends nearly two years of harsh litigation pitting S&P against the Justice Department, California and 18 other states.

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“Some observers criticized the overall settlement as too light.

“Ironically, the claims being made about the settlement appear to be as inflated as the credit ratings were in the years before the financial crash,” said Dennis Kelleher, chief executive of Better Markets Inc., a Washington financial reform group. “Allowing S&P to eliminate its liability merely by using shareholders’ money to pay a settlement, however big, seven years after the crash is not a meaningful punishment.”

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Read the full LA Times article by E. Scott Reckard and Dean Starkman here.

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