Should the government sue Standard & Poor's over the financial crisis?

Standard & Poor's on Monday announced that the Justice Department and several states were considering slapping the credit rating agency with civil charges over its alleged role in facilitating the 2008 financial crisis. The government is reportedly thinking about taking the company to court after S&P balked at a settlement in the $1 billion range — which would be enough to wipe out parent company McGraw-Hill's entire profit from 2012. If the case were to go to court, it would be one of the most significant legal actions the government has taken against any company involved in the crisis.

To rewind a bit: The financial crisis was caused by several interlocking factors, and shoddy credit ratings was certainly one of them. The big three credit-rating agencies — S&P, Moody's, and Fitch — have all been heavily criticized for the role they played in the business of buying and selling mortgage-backed securities. Many of those securities were given highly coveted AAA credit ratings by the agencies, meaning they were supposedly ultra-safe investments, facilitating their spread throughout the financial system. When the housing bubble began to burst in late 2006, the value of those securities crumbled, showing just how risky and toxic the underlying mortgages actually were.

S&P says any lawsuit brought by the government would be "entirely without factual or legal merit." The company notes that other credit-rating agencies made the same errors, and that before the crisis no one — not even government officials — thought the housing market would tank as badly as it did. S&P also claims that it began to downgrade certain mortgage-backed securities as early as 2006. "With 20/20 hindsight, these strong actions proved insufficient — but they demonstrate that the [Department of Justice] would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith."

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S&P's statement reveals its legal strategy: No one else got it right, so how can you single us out? In addition, The Wall Street Journal reports that S&P has used the First Amendment's free speech protections to dismiss lawsuits brought by investors who feel they were misled.

If the government decides to bring charges, it will likely focus on apparent conflicts of interest in S&P's business model. All the credit-rating agencies were being paid by Wall Street's biggest firms for the ratings they gave, which meant S&P had a tantalizing incentive to bestow better and safer ratings than its competitors. Critics say that the more scrupulous S&P was about risky securities, the less it would get paid. The U.S. Senate Permanent Subcommittee on Investigations said the business model encouraged a "race to the bottom" that facilitated AAA ratings galore for mortgage-backed securities.

Of course, proving purposeful deceit is difficult in court, one reason why there have been so few prosecutions related to the greatest financial disaster since the Wall Street Crash of 1929. And therein lies the risk for the government.