US authorities are stepping up their investigation into whether Moody’s inflated ratings on mortgage derivatives to win business in the lead-up to the financial crisis following a record settlement with its rival Standard & Poor’s.
With S&P agreeing to pay $1.375bn to settle allegations that it boosted mortgage securities ratings, attention has switched to Moody’s.
Attorneys-general in Connecticut and Mississippi said they are among the prosecutors stepping up their examination of the business. They were among the authorities that settled with Standard & Poor’s, the largest of the rating agencies, which agreed to pay the record sum to the Department of Justice, 19 US states and the District of Columbia.
Federal prosecutors recently interviewed Moody’s officials but it is unclear whether the long-running probe will result in a lawsuit, according to people familiar with the case.
“Our office intends to pursue the Moody’s case now that the S&P case is resolved,” said a spokesman for George Jepsen, Connecticut’s attorney-general.
The Financial Crisis Inquiry Commission, which issued a report on the many causes of the credit crisis, used Moody’s as a case study for the rating agencies’ role in attracting even conservative investors into mortgage-related securities. The Commission cited former Moody’s executives who argued the company became too focused on winning market share in ratings — a characterisation the company has always denied.
With respect to the investigations from the state attorneys-general, Moody’s said: “We continue to believe that the cases are without merit.”
S&P agreed to pay $687.5m to DoJ and another $687.5m to 19 state attorney-general offices and the District of Columbia, which all sued the credit-rating agency.
The agreement also meant vindication for the DoJ, which was accused of suing S&P in 2013 in retaliation for its downgrade of US government debt in 2011.
As part of the settlement, the S&P formally retracted that accusation, which attorney-general Eric Holder on Tuesday called “utter nonsense”. S&P also agreed to a 16-point statement of facts acknowledging employees knew about the risks in subprime mortgage bonds in the lead-up to the 2008 crisis.
“After an exhaustive two-year fishing expedition, S&P has withdrawn the allegation and acknowledged that nothing in the mountains of information it has received from the government supports S&P’s claim of an improper motive,” said acting associate attorney-general Stuart Delery.
“As we have proven time and again, we will not be deterred or outlasted,” Mr Holder said. “No unlawful conduct is too complicated to pursue. And no financial institution, at home or abroad, is too powerful to be held accountable for wrongdoing.”
As part of the settlement, S&P did not admit that it violated any laws. S&P says it has introduced new research and compliance procedures to make sure that ratings are not inflated to win business.
The company was accused of handing out rosy ratings for residential mortgage-backed securities and collateralised debt obligations to try to win more business from 2004 to 2007.
“After careful consideration, the company determined that entering into the settlement agreement is in the best interests of the company and its shareholders and is pleased to resolve these matters,” S&P said.
Shares in McGraw Hill Financial, S&P’s parent company, rose 4 per cent by end of day in New York, reflecting investor relief that the company had not been forced to admit legal breaches as part of the settlement.
Analysts had been concerned that any statement of facts in the DoJ case could aid other outstanding lawsuits against the company over its crisis-era ratings. Moody’s shares were also up, though remain below their price last week, when it became clear the DoJ had not yet abandoned its probe of the smaller agency.
Separately, S&P also settled claims by the California Public Employees’ Retirement System related to ratings of three structured investment vehicles. The company agreed to pay Calpers $125m in that settlement.
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