NEW YORK (AFP) - The US Justice Department plans to sue Standard & Poor's over its rating of mortgage bonds prior to the 2008 financial crisis, S&P said on Monday.
The suit, according to S&P, targets its ratings in 2007 of certain collateralised debt obligations, packages of mortgages sold to investors that were at the centre of the the 2008 financial crisis sparked by the US housing collapse.
S&P promised a vigorous defence, saying the looming lawsuit would be "entirely without factual or legal merit." A Justice Department spokeswoman declined to comment, but media reports said the suit could be filed later this week.
The US complaint, as described by S&P, appears to allege that S&P's high ratings on CDOs played a major role in the crisis because of the confidence they engendered in investors.
But S&P said that in 2007 and prior to that time it had downgraded a number of residential mortgage-backed securities included in the CDOS ahead of other ratings agencies.
"With 20/20 hindsight, these strong actions proved insufficient - but they demonstrate that the DoJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith," S&P said.
US prosecutors have questioned former S&P analysts on whether the firm ignored its own standards when rating the securities because of fees from investment banks, according to a report in the Wall Street Journal.
Up until last week, the Justice Department and S&P had held settlement talks. But the discussions ceased after the Justice Department said it would seek at least US$1 billion (S$1.24 billion) to settle the case, according to the New York Times, which cited people who were briefed on the government's plans.
S&P contends that it was far from alone in its failure to predict the scale of the collapse of the US housing market.
That collapse wiped hundreds of billions of dollars in value from mortgage securities, leading to the government having to step in and rescue major banks which had invested in them.
Rather, S&P cited the congressional testimony of a former Securities and Exchange Commission chairman who said the SEC, the Federal Reserve and three other US agencies themselves did not predict the market collapse.
"Regrettably, the breadth, depth and the effect of what ultimately occurred were greater than we - and virtually everyone else - predicted," S&P said.
The S&P suit would be the first US suit against a credit ratings agency.
S&P, along with peers Moody's and Fitch, has come in for heavy criticism for failing to unearth the problems with certain collateralized debt obligations.
S&P is a unit of McGraw-Hill, whose shares fell 13.8 per cent Monday after the news of the suit. Fellow ratings agency Moody's was also lower, by 10.7 per cent.
Moody's did not immediately respond to a request for comment.
A Fitch spokesman said he is "unable to comment on the S&P matter as it does not involve us, other than to say we have no reason to believe Fitch is a target of any such action." The suit, which is expected to be joined by state governments, could be filed as soon as this week, according to the Wall Street Journal.