In the fallout of the financial crisis, many argued that the credit ratings agencies’ competition for business led to ratings shopping among bond issuers and relaxed ratings standards for the ratings agencies themselves.
Last year, Standard & Poor’s reached a settlement with the Department of Justiceand nearly 20 states, which required S&P to pay $1.375 billion over claims that S&P knowingly misled mortgage bond investors by issuing trumped-up ratings for pre-crisis residential mortgage-backed securities.
That same day reports emerged that the DOJ was planning to look into the mortgage bond ratings activities of Moody’s Investor Service during the run-up to the financial crisis as well.
Now those chickens appear to be coming home to roost for Moody’s, as the company disclosed Friday that it is expecting a lawsuit from the DOJ over the ratings it issued for residential mortgage-backed securities and collateralized debt obligations before the crisis.
Moody’s revealed the pending lawsuit in its third-quarter earnings release in a section entitled “Litigation Update.”