Here is the basis of the case the U.S. government is making against Standard & Poor's Ratings Services in a 128-page lawsuit:
— THE CHARGE:
The government accuses S&P of knowingly giving high grades to risky mortgage-backed securities from about 2004 to 2007. The mortgages underlying those securities later imploded, costing investors billions in losses and helping fuel the 2008 financial crisis.
S&P is an agency that assigns ratings to investments. When an investment has a high rating, the risk is considered low. Even the most conservative investors, like some pension funds, can feel confident enough to buy it.
Banks and other financial firms approach S&P and other major rating agencies when they have an investment that needs to be rated. The system contains an oddity: The banks not only pay for the ratings they receive but can shop around to see which rating agency might give them the highest marks. This creates a conflict of interest: To earn business from the banks, the rating agencies can feel pressure to give high grades to the banks' investment products.
The government says S&P knowingly gave high grades to banks' risky mortgage-backed securities that later soured because it wanted to earn more business from the banks.
The government refers to comments by S&P executives that they wanted their ratings to be handled in a "business friendly" way. The lawsuit also points to emails in which an S&P analyst says the company's executives fear angering the banks by assigning low ratings to their securities. In another email, an analyst complains about missing out on a deal because S&P's criteria on a rating were stricter than those of its rival Moody's.
The government also refers to emails in which some S&P employees appear to know how severe the subprime mortgage crisis is, even though they still had high ratings on subprime-backed mortgage bonds. In one report, the performance of subprime investments was so bad that S&P employees thought the numbers must be typos. One analyst emailed a video of himself singing about the collapse of subprime mortgages, with colleagues laughing.
— THE GOVERNMENT'S ROLE:
The Justice Department is the government arm that filed the lawsuit. The government has an obligation to make investing fair and safe. But it's been accused of failing to aggressively pursue wrongdoing related to the financial crisis. It has been under pressure to show it can bring and win lawsuits.
The lawsuit does not involve any criminal allegations. Critics have long complained about the government's failure to bring criminal charges against any major Wall Street players involved in the financial crisis. Criminal charges would require a higher burden of proof.
— THE SIGNIFICANCE:
This is the first time the federal government has filed a lawsuit against a major credit rating agency over actions related to the financial crisis. S&P is also known as the rating agency that downgraded long-term U.S. debt in 2011.
— THE DEFENSE:
S&P denies wrongdoing and says it can't be blamed for failing to predict the financial crisis. It notes that the government was also saying as late as 2007 that the subprime mortgage crisis would likely be contained. In addition, S&P says the lawsuit has taken its employees' emails out of context.
S&P says it "deeply regret(s)" that some investments didn't perform as well as expected. But it adds, "20/20 hindsight is no basis to take legal action against the good-faith opinions of professionals."