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'Burning Down the House' Email Reflects Culture of Vigorous Debate: Standard & Poor's

Tickers in this article: MHP

NEW YORK (TheStreet) -- McGraw-Hill Cos.(MHP) , the parent of Standard & Poor's Rating Services, said Tuesday it has a very strong defense against the Department of Justice civil lawsuit filed last week.

"S&P has a record of successfully defending these types of cases, with 41 cases dismissed outright or voluntarily withdrawn," the company said in a statement.

The Department of Justice filed a civil lawsuit against the rating agency last week alleging that it defrauded investors, many of them federally insured institutions, by issuing inflated ratings that misrepresented true risks of the securities.

The lawsuit said "S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P's relationships with investment banks when, in actuality, S&P's desire for increased revenue and market share led it to favor the interests of these banks over investors."

The lawsuit highlighted internal emails at the agency during the height of the boom as evidence to back its allegations.

The emails showed analysts ridiculing deals, questioning the agency's models and predicting a collapse in housing. "We rate every deal. It could be structured by cows and we would rate it," one analyst said in an email.

Another employee mocked the overheated housing market, writing lyrics set to the tune of "Burning Down the House" by the rock band Talking Heads.

These emails were "cherry-picked," the company said in its statement and "display a culture of vigorous debate but not of wrongdoing."

"The fact is, before 2007, and increasingly during 2007, S&P downgraded a record number of U.S. residential mortgage-backed securities (RMBS) and repeatedly warned of deteriorating conditions in the housing market and potential downgrades to come," the release said. "Unfortunately, these actions turned out to be insufficient in anticipating the severity of the housing crisis that ultimately came to pass. However, the Company does not believe the Department of Justice can prove that this failure -- common to nearly everyone at the time -- was the product of intentional misconduct by anyone at S&P."

Fourth-quarter revenue at the agency rose 34% to $584 million, while operating profit rose 63% to $254 million.

The rating agency posted revenues of $2.03 billion in 2012 with an adjusted operating profit of $865 million.

McGraw Hill reported full-year revenue of $4.4 billion and net income from continuing operations of $676 million.

The DoJ lawsuit is seeking about $5 billion in damages in its lawsuit, more than five times the agency's annual profit.

-- Written by Shanthi Bharatwaj from New York