Taking Stock: Government lawsuit targets McGraw-Hill in subprime mortgage fiasco

Malcolm Berko: The suit against Standard & Poor's and its parent, McGraw-Hill (MHP-$48), accuses S&P of fraud by intentionally misleading investors about the financial quality and ratings of trillions of dollars' worth of subprime mortgage securities.
By Malcolm Berko Modified: March 22, 2013 at 7:08 pm •  Published: March 24, 2013
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Dear Mr. Berko: Please explain why the government is suing Standard & Poor's and its parent, McGraw-Hill. I bought 235 shares of McGraw-Hill at $21 in March 2009. I bought them because I had this bee in my bonnet telling me to. The stock went up to $58 this January, and I had the same bee in my bonnet for weeks, telling me to sell it. I'm kicking myself for not having the courage of my convictions; it's now down 10 points. I don't know what to do. Should I sell my 235 shares, or should I buy more at $48? Now I'm thinking about buying a Treasury inflation-protected securities fund my broker is recommending. I have a $7,500 certificate of deposit coming due, but at age 66, would it be better for me to buy 200 shares of AT&T, which pays 5.3 percent?

BR, Springfield, Ill.

Dear BR: Wow, you're good! I wouldn't have bought McGraw-Hill in March 2009 at $21. The next time that bee is in your bonnet, send me an email with the bee's name and address.

The suit against Standard & Poor's and its parent, McGraw-Hill (MHP-$48), accuses S&P of fraud by intentionally misleading investors about the financial quality and ratings of trillions of dollars' worth of subprime mortgage securities. The suit alleges that S&P management instructed employees to give the highest-quality (Triple-A) ratings to toxic subprime mortgage-backed securities that should have been rated triple-C or lower. Investors, pension funds, mutual funds, insurance companies and state retirement plans relied on S&P's highest rating and purchased what turned out to be the lowest-rated junk securities.

The subsequent losses were biblical in scope, and our economy nearly imploded. The government is suing for $5 billion, a pittance compared with the hundreds of billions lost because investors believed in the integrity and probity of S&P.

Most observers believe that S&P is guiltier than sin.

However, blame also must be ascribed to the investment bankers who purposefully structured these risky mortgages for sale to the public. Goldman Sachs, JPMorgan Chase, Bank of America, etc., certainly knew that these securities were trash but represented them to the public as Triple-A quality. Like knowingly using billions of counterfeit dollars, Wall Street's prestigious brokerages misused the public's trust and peddled them as the real thing. These are the same broksters your employers hired to manage their corporate, state and municipal retirement plans. Now you know why so many pension accounts, during the past few years of a hugely rising market, are still dangerously underwater and can't meet their obligations.

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