Ohio AG Sues Credit Rating Agencies over MBS Ratings
Ohio Attorney General Richard Cordray filed a lawsuit against the nation’s three largest credit rating agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — claiming the agencies unsettled US financial markets by providing unjustified and inflated ratings of mortgage-backed securities (MBS) in exchange for lucrative fees from securities issuers.
The suit was filed on behalf of five Ohio public employee retirement and pension funds, alleging the agencies improperly issued triple-A ratings to risky investments. Cordray’s office said the improper ratings cost the Ohio Funds losses in excess of $457m.
“The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk. But they sold their professional objectivity and integrity to the highest bidder,” Cordray said in a statement. “The rating agencies’ total disregard for the life’s work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what’s wrong with Wall Street today.”
The suit alleges the agencies “made spectacularly misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating,” Cordray’s office said.
“Contrary to the representations of the rating agencies, these mortgage-backed securities were, in fact, high-risk investments that lost tremendous value as the housing market collapsed and mortgage foreclosures accelerated,” Cordray said.
This is the eighth lawsuit Cordray’s office filed against financial and investment firms connected to the economic downturn. So far, those suits have resulted in $2bn in recovered damages.
In a prepared statement, Moody’s said: “The suit against Moody’s is without merit. Moody’s ratings were and continue to be based on clearly defined and publicly disclosed methodologies. It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption.”
Also in a prepared statement, S&P said: “We believe the claim has no legal or factual merit and we intend to vigorously defend ourselves against it,” adding, “a recent SEC [Securities and Exchange Commission] examination of our business practices found no evidence that decisions about ratings methodologies or ratings models were based on attracting or losing market share.”
Representatives from Fitch Ratings did not respond to request for comment when this story was published.
Write to Austin Kilgore.
Don’t miss out: get HW delivered via email
- Current Chg.
- NASDAQ 3498.97 33.722 ^ixic
- S&P 500 1649.6 -0.91 ^gspc
- Volatility Index 13.99 -0.08 ^vix
- KBW Mort. Financial Index 32.45 -0.13 ^mfx
- MSCI US REIT Index 1021.85 -2.87 ^rmz