North Carolina receiving $21.5M in settlement with S&P over crisis-era ratings

North Carolina will receive $21.5 million as part of a settlement with Standard & Poor’s to resolve claims that the credit-rating agency knowingly inflated its ratings of risky mortgage bonds that helped create the financial crisis.

The settlement is part of a $1.38 billion accord announced Tuesday between the U.S. Justice Department and Standard & Poor’s Financial Services LLC, a subsidiary of McGraw Hill Financial, over ratings issued from 2004 to 2007.

The deal resolves lawsuits filed by the attorneys general of 19 states and the District of Columbia.

N.C. Attorney General Roy Cooper announced the state’s portion of the settlement at a news conference in Raleigh. Cooper said the state filed its lawsuit in 2013, the same year the Justice Department sued.

S&P’s “highly inflated ratings” harmed North Carolina by helping trigger the financial crisis, Cooper said at the news conference.

“Good ratings led investors to make bad bets on risky securities, and this contributed to job losses and foreclosures that hit taxpayers and businesses in North Carolina hard,” he said. “This deceit cost North Carolina jobs and income, and that hurt taxpayers.”

S&P’s actions “did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression,” Attorney General Eric Holder said in a statement Tuesday.

It does not appear that North Carolina consumers will receive any direct relief from the accord, which settles claims that investors were defrauded by the ratings during the lead-up to the financial crisis.

In past national mortgage settlements involving North Carolina, Cooper decided how much should go toward consumer relief. For example, in June, Cooper announced that North Carolina homeowners were getting more than $21 million in relief from a settlement with SunTrust Banks.

But a change in state law that took effect last year gives the General Assembly the power to decide how to spend settlement funds.

Of North Carolina’s portion of the S&P settlement, $2.1 million will be a penalty and fine paid by S&P, Cooper said. Under North Carolina law, that amount will automatically go to North Carolina public schools, he said.

Cooper recommended Gov. Pat McCrory and the General Assembly put the remainder of the settlement to two uses: funding the North Carolina Teaching Fellows program, a teacher-recruitment program; and raising salaries to slow turnover of scientists at the state’s crime lab.

Peter Skillern, executive director of Durham-based Reinvestment Partners, a group that advocates for borrowers, thinks the settlement funds should be used to help North Carolinians still struggling with foreclosure.

“Fortunately, the foreclosure rate is declining as the economy improves and we move through the end of the crisis,” Skillern said. “But in relative terms, foreclosures are still high, and we’ve seen no significant drop in the number of clients that we serve.”

In a statement, McCrory said the settlement will allow the state “to incorporate an additional $21.5 million in our $20 billion budget recommendations as we focus our investments in jobs, education, public safety, public health and transportation.”

McGraw Hill Financial said the settlement contains no findings of violations of law by itself, S&P Financial Services or Standard & Poor’s Ratings Services and that it is “pleased to resolve these matters.”

Some critics said the settlement does not go far enough.

Dennis Kelleher, president of nonprofit advocacy group Better Markets, in a statement Tuesday called the settlement “grossly inadequate.” Kelleher said the accord falls short by, among other things, lacking an admission of guilt or details on “exactly” what S&P did, how it profited and whom it harmed. “The American people deserve much better.”

The three big rating agencies – S&P, Moody’s Investors Service and Fitch Ratings – have been blamed for helping fuel the 2008 crisis by giving high ratings to high-risk mortgage securities. The high ratings made it possible for banks to sell trillions of dollars’ worth of those securities. Some investors, such as pension funds, can only buy securities that carry high credit ratings.

Those investments soured when the housing market went bust in 2006.

Experts say the Justice Department’s lawsuit against S&P could serve as a template for action against Fitch and Moody’s. The Associated Press contributed.