The McGraw-Hill Companies, Inc.
) plunged 23% in the last two days as investor sentiment wavered
following the news of a civil lawsuit filed by the United States
Department of Justice against its subsidiary, Standard &
Poor's Rating Services (S&P) for deliberately providing high
ratings in 2007 to U.S. collateralized debt obligations (CDOs)
and residential mortgage backed securities (RMBS) that
underperformed and fueled the collapse of the housing market.
S&P has strongly denied the allegations of the Department
of Justice, which is seeking approximately $5 billion in the
reported. The U.S. Government stated that S&P did not
properly highlight the credit risks related to the mortgage
securities issued by the investment banks in order to get more
business from them.
However, S&P stated that the ratings were provided on the
basis of subprime mortgage data that was accessible to others as
well as government officials, who in 2007 claimed that subprime
woes have limited impact.
The lawsuit filed by the government is the first legal action
undertaken against a rating firm. The two other industry
) and Fitch Ratings are still not on the radar. Rating companies
have been facing criticism for the procedure by which they had
assigned a grade to the mortgage securities since the financial
crisis. S&P provided credit ratings on over $2.8 trillion of
RMBS and approximately $1.2 trillion of CDOs between Sep 2004 and
Earlier, the discussion between S&P and the government
officials failed, when the latter demanded a penalty of above $1
billion, reported by
New York Times
, the flagship newspaper of
The New York Times Company
). S&P said that it employed approximately $400 million in
the last 5 years to strengthen the reliability, objectivity,
independence and performance of ratings. Moreover, it has now set
tough criteria for the securities to attain AAA ratings,
considering the challenging global economy.
McGraw-Hill, which holds a Zacks Rank #3 (Hold), is slated to
report its fourth-quarter 2012 results on Feb 12, 2013. The
company previously entered into an agreement with
Apollo Global Management, LLC
) to divest its education division for $2.5 billion.
The move is a strategic attempt on the company's behalf to
restructure its portfolio of businesses and concentrate more on
high growth operations, thereby enhancing shareholder value
through proper capital allocation.
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