Moody’s Accused of Refusing To Explain Its Role in Financial Crisis

Allison Tussey —  April 20, 2010 — 6 Comments

Moody’s Investors Service, the giant bond-rating firm, has been accused of withholding evidence documenting its role in the housing and Wall Street meltdown. Court action has been instituted to force Moody‘s to explain why it gave its highest ratings to “risky and toxic” mortgage-backed securities that ultimately cost investors and taxpayers billions of dollars.

Moody‘s and other credit rating agencies ignored red flags in the run-up to the collapse in housing prices and gave stellar ratings to shaky securities, which made those investments appear as safe as government-issued Treasury bonds.

Moody‘s and other ratings agencies worked behind the scenes with the same Wall Street firms that created the securities, earning billions of dollars in revenue from those firms at a rate nearly double what they earned for rating other securities.

California Attorney General Edmund G. Brown Jr. announced the court action.

Brown’s action comes seven months after the Attorney General subpoenaed Moody‘s, but the firm has refused to comply with the subpoena.

The subpoena issued by Brown’s office on Sept. 17, 2009, seeks to determine:

– Whether Moody‘s knew that the AAA ratings it gave to high-risk securities weren’t warranted
– Whether Moody‘s made fraudulent representations about the quality of its ratings
– Whether Moody‘s made fraudulent representations concerning the independence of its ratings
– Whether Moody‘s conspired with companies it rated to the detriment of investors
– Whether Moody‘s profited from giving inaccurate ratings to some securities
– Whether Moody‘s compromised its own standards and safeguards in order to increase its own profits.

Moody‘s and other Wall Street ratings agencies grade the credit worthiness of the bonds and securities that corporations and municipalities issue. Investors depend on these ratings to gauge risk in making investments. At the peak of the housing boom, these agencies gave their highest ratings to complicated, high-risk financial instruments that soon accelerated the financial collapse.

Banks, pension funds and other investors, in California and elsewhere, relied on these ratings when they purchased trillions of dollars of securities backed by risky mortgages, seeking high returns and reassured by ratings indicating the issues were low-risk. Those purchases helped inflate the housing bubble by enabling ever-riskier mortgages.

When the speculative bubble burst, those risky mortgages defaulted in record numbers and investors were left unable to sell now-worthless securities. The agencies then downgraded the credit ratings of more than $1.9 trillion in residential mortgage-backed securities, a tacit acknowledgement they had ignored or did not understand the risks of the debt they rated.

Moody‘s is one of the most profitable companies in the country. It had the highest profit margin of any company in the S&P 500 in the years leading up to 2008 – higher than Google or Microsoft, according to U.S. Representative Henry Waxman, Chairman of the House Committee on Oversight and Government Reform.

Brown’s investigation of Moody‘s is one of many actions by his office to fight financial abuses relating to the mortgage meltdown, including his 2008 lawsuit that resulted in an $8.68 billion settlement with Countrywide Home Loans over its fraudulent lending practices, as well as recent crackdowns by the Attorney General on foreclosure consultants and loan-modification scammers.

“The need for court action to enforce a state subpoena is highly unusual,” Brown said, “because companies almost always comply without such a drastic step being necessary.” But he said Moody‘s, which played a central role in the run-up to the collapse of housing prices, has refused to explain its ratings practices to the state. Moody‘s said responding to the state subpoena would be a “waste of time.”

“The state’s subpoena seeks information regarding Moody‘s decision to give its highest credit ratings to securities backed by risky and toxic mortgage-backed securities,” Brown said.

“By taking this step, I intend to stop Moody’s from ignoring the state’s subpoena,” Brown said. “The people of California have the right to know how this credit rating agency got it so wrong and whether it violated California law in the process.”

“But investors swiftly learned that the ratings were as worthless as the securities themselves,” he said.

“A central question in the aftermath of the financial meltdown is whether Moody’s gave investment banks and other securities packagers unwarranted high ratings at the expense of investors, who depended upon the integrity and independence of Moody’s ratings,” Brown said.

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Allison Tussey

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6 responses to Moody’s Accused of Refusing To Explain Its Role in Financial Crisis

  1. Don’t forget that government laws gave Moody and a few other raters an exclusive by REQUIRING rating from those particular services. This was a big part of the problem. Had there been a true free market in ratings services this could not have happened. Again, big government’s fingerprints are all over this mess.

  2. I was ripped off to the tune of 5K by Jesse Wheeler and JW Financial Solutions of Roseville, Ca.

    I sued him and won a judgement in court against him. Of course, he refuses to pay me. Has anyone else been successful with suing JW and/or getting their money back? How can I see that this guy goes to jail for fraud? Do I need to file a complaint with the FTC? I see many, many others here on this site that are in the news and going to jail for even less than what JW is doing. He is still in business, under a different company name now, and has defrauded many, many people…probably in the millions of dollars. He is a criminal and needs to go to jail.


    Replace ratings agencies with an appointed review panel to assign ratings? Something that is hands off, not to be questioned in their assignment of ratings and removed from “the pressure”. I’m thinking something like the Camera Stellata.

  4. “Brown said Moody’s was a “linchpin” in a chain of brokers, lenders and bankers that helped fuel the housing bubble while ignoring red flags pointing to an imploding economy.”,0,1961229.story

    oooooh weeeeeee! what up wit dat? what up wit dat?


  5. I forgot to mention – we want to see that Burka on the next Fraudline webcast!

  6. I hope these assclowns are facing lawsuits into perpetuity. Happy thoughts.

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