By most accounts, 2012 was a great year for The McGraw-Hill Cos. Inc. It sold its education business for $2.5 billion. It teamed up in a new venture that put the Dow Jones industrial average and the S&P 500 stock indices under the same ownership. And its stock price climbed to five-year highs.
Then, in the past week, the federal government sued McGraw-Hill. The lawsuit essentially claims the company defrauded taxpayer-backed mortgage companies by giving a triple-A rating to IOUs backed by trashy home mortgages. The Department of Justice has threatened to ask for $5 billion. That's almost half the company's public value.
When McGraw-Hill reports its fourth-quarter and full-year results Tuesday, no one will be impressed. The company had hoped to trumpet its restructuring last year, separating mature businesses like textbook publishing from the faster-growing, more appealing financial services businesses.
It is a strategy that was working. With interest rates at historic lows, companies have been rushing to issue bonds. In the third quarter, the volume of new corporate IOUs from U.S. companies jumped 72 percent from a year earlier. European companies selling bonds more than doubled. In order to sell those bonds to investors, each needs a blessing from a credit-rating agency like McGraw-Hill's Standard and Poor's unit. That business brings in three-quarters of McGraw-Hill's profits.
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But more than four years after the housing bust began, McGraw Hill's credit-rating business is in the cross hairs of government prosecutors. Its reputation has been hurt, and its stock has plunged.
How the company will survive 2013 is what investors want to hear Tuesday.
Tom Hudson, anchor and managing editor of "Nightly Business Report," can be followed on Twitter@HudsonNBR.