WASHINGTON Standard & Poor's is prepared
to spend years beating back a federal lawsuit that accuses the company
of giving falsely high ratings to mortgage investments that helped
trigger the financial crisis, executives said Tuesday.
"Rest
assured, we will vigorously defend against these erroneous claims," said
Harold McGraw III, president and CEO of The McGraw-Hill (
MHP), which owns S&P, on a call with analysts.
The government may seek up to $5 billion -
several years' worth of profits for McGraw-Hill, it said in a civil
complaint filed in Los Angeles federal court last week. The company
believes the charges lack merit, but the case is likely to drag on for
three or more years, general counsel Ken Vittor said on the call.
The
call was scheduled in connection with McGraw-Hill's fourth-quarter
earnings report, but executives spent much of it refuting the
government's allegations. CEO McGraw and the company's top financial
executive shortened their remarks to leave time for the legal
discussion.
McGraw-Hill swung to a loss in the three months ended
Dec. 31 as its transition to a financial information provider forced it
to take a big, one-time charge. Excluding one-time items, the company's
net income declined but narrowly beat Wall Street's forecasts.
Despite
what McGraw called "an outstanding year," analysts on the call focused
on the company's ability to fend off the lawsuit and maintain growth in
the Standard & Poor's Rating Services division.
Executives
said they expect the credit rating business to keep growing despite the
new scrutiny. Low interest rates are making it easier for companies to
issue bonds. Demand for ratings is spiking from emerging markets like
India, they said.
Standard & Poor's Ratings is crucial to
McGraw-Hill's bottom line. The rating business contributed 70 percent of
McGraw-Hill's operating profit and 46 percent of its revenue from
continuing operations in 2012. The company is shedding non-financial
businesses like its textbook publisher.
The Justice Department
accused S&P of knowingly inflating its ratings because it wanted to
earn more business from its clients - the banks whose investments it was
hired to rate.
According to the lawsuit, S&P recognized in
2006 that home prices were sinking and that borrowers were having
trouble repaying loans. Yet these facts weren't reflected in the safe
ratings S&P gave to complex real-estate investments known as
mortgage-backed securities and collateralized debt obligations, the
lawsuit alleges.
High ratings from the three agencies made it
possible for banks to sell trillions in risky investments. Some
investors, including pension funds, can buy only securities that carry
high credit ratings.
The charges are the Obama administration's
most aggressive action to date against those deemed responsible for
contributing to the worst financial crisis since the Great Depression.
They follow years of criticism that the government had failed to do
enough.
Vittor, the general counsel, cast doubt Tuesday on the
government's ability to prove its case. Responding to a question about
why S&P was singled out among the big three rating agencies, he
said, "For us, the question is less the 'why' than the 'how': How will
the Department of Justice prove a fraud claim against S&P's analysts
for arriving at ratings through a committee process that are identical
to the ratings issued independently by other rating agencies?"
It
is not clear why the government charged only S&P, or whether it will
file charges against Fitch and Moody's, S&P's two main rivals.
Responding
to the charges Tuesday, executives noted that they have successfully
defended against 40 other financial crisis-related lawsuits. They said
they are open to "discussing reasonable settlements" to end this or any
other lawsuit.
S&P
declined to say how much the case is costing. Chief Financial Officer
Jack Callahan said "it's not an insignificant item in our income
statement right now." He said the company understands the cost may
increase in 2013. That expectation is reflected in its earnings
guidance.
The company introduced 2013 revenue guidance of "high
single-digit growth," suggesting that revenue this year could fall
between $4.76 billion and $4.85 billion. It expects adjusted earnings
per share this year of $3.10 to $3.20.
The McGraw-Hill Cos., based
in New York, lost $216 million, or 76 cents per share, in the three
months ended Dec. 31. That compares with net income of $214 million, or
73 cents per share, a year earlier.
The loss was driven by a $497
million charge McGraw-Hill took on the pending sale of its education
division. McGraw-Hill said in November that it will sell the textbook
and e-learning publisher for $2.5 billion in cash and debt. As part of
the deal, McGraw-Hill will be renamed McGraw Hill Financial.
The
charge, which had been announced previously, was related to inventory,
previous investments and goodwill in the textbook publishing group.
Excluding
one-time items, the company's adjusted net income was $214 million, or
75 cents per share, compared with $263 million, or 90 cents per share, a
year earlier.
Analysts surveyed by FactSet had expected, on average, adjusted earnings of 69 cents per share.
Revenue
from continuing operations rose to $1.23 billion from $1 billion a year
earlier. Both figures exclude revenue generated by the education
division that is being spun off, a company spokeswoman said. Total
revenue in the quarter was $1.68 billion, she said.
Analysts had
expected revenue of $1.53 billion. The McGraw-Hill spokeswoman said the
estimates were based on total revenue, including the education division.
On that basis, revenue in the quarter was 10 percent above Wall Street
forecasts.
For 2012, McGraw-Hill earned net income of $437 million on revenue of $4.45 billion.
McGraw-Hill
shares rose 12 cents to $44.40 as of 12:15 p.m. Eastern time. They
remain near a recent low, having traded between $42.02 and $58.62 over
the past 52 weeks.
© 2013 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.
, finally exiting that pesky triple dip recession it has been stuck in for the past five years, moments ago the Cabinet Office reported that
contrary to optimistic expectations, in the 4th quarter the economy
again contracted for the third straight quarter, this time by 0.4%
annualized, and 0.1% on a Q/Q basis. This was driven by a whopping 14%
SAAR implosion in exports, which should not come as a surprise to those
who have been tracking the ongoing destruction of Japan’s trade balance
(and current account surplus). “Japan’s economy may show some weakness
for the time being. But it is likely to resume a moderate recovery
thereafter due to the Bank of Japan’s monetary easing, the effect of an
emergency economic package, as well as an expected moderate recovery in
the global economy
.jpg)
