(Updates with previous settlement discussions in fifth paragraph.)
Feb. 6 (Bloomberg) -- The U.S. government will prevail in its lawsuit accusing McGraw-Hill Cos. and its Standard & Poor’s unit of fraud, former Securities and Exchange Commission Chairman Arthur Levitt said.
“The government is going to win,” Levitt said in an interview today with Tom Keene on Bloomberg Radio. “McGraw-Hill was foolish not to have made a settlement.”
The Justice Department this week sued McGraw-Hill, claiming that S&P deliberately understated the risk of bonds backed by mortgages made to the riskiest borrowers to win business from Wall Street banks. S&P rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint.
Levitt said any settlement, while “substantial,” will “come south” of the $5 billion that the U.S. is seeking. The penalties are based on losses suffered by federally insured financial institutions, according to acting U.S. Associate Attorney General Tony West. The department considered that number “fairly conservative,” West said.
McGraw-Hill had been in “extensive discussions” with the government over the accusations for at least four months, Floyd Abrams, a lawyer representing the company, said yesterday. Settlement talks broke down after the government sought a fine of more than $1 billion and an admission of wrongdoing from S&P, the New York Times reported.
Edward Sweeney, a spokesman for New York-based McGraw-Hill, declined to comment on Levitt’s predictions.
McGraw-Hill fell 0.8 percent to $44.57 at 11:14 a.m. in New York. The shares have slipped 24 percent since the company said Feb. 4 that it expected the lawsuit.
Levitt is a board member of Bloomberg LP and an adviser to Goldman Sachs Group Inc., Carlyle Group LP and Promontory Financial Group LLC.
--With assistance from Matt Robinson in New York. Editors: Steven Crabill, Steve Dickson