Moody’s Corp. agreed to pay nearly $864 million to settle claims for its role providing credit ratings for Residential Mortgage-Backed Securities and Collateralized Debt Obligations that contributed to the financial crisis.
On Friday, the Department of Justice, 21 states, and the District of Columbia announced the settlement agreement with Moody’s Investors Service Inc.,Moody’s Analytics Inc., and their parent, Moody’s Corporation, resolving pending state court lawsuits in Connecticut, Mississippi, and South Carolina, as well as potential claims by the Justice Department, 18 states and the District of Columbia.
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.”
The U.S. Justice Department will decide in the next few months whether it will sue Moody’s Corp. for allegedly inflating ratings on mortgage bonds at the heart of the 2008 financial meltdown, according to people familiar with the matter.
The multiyear inquiry into Moody’s is among the remaining live investigations into the mortgage lenders, Wall Street banks and ratings firms that the government has sought to hold accountable for the subprime crisis. A year ago, ratings company Standard & Poor’s, a unit of McGraw Hill Financial Inc., paid $1.5 billion to resolve allegations that it had inflated mortgage-bond ratings to gain business during the housing boom.
Any case against Moody’s would be smaller than the one against S&P because the pool of Moody’s-rated securities at issue is smaller, one of the people said.
The government could sue Moody’s, reach a monetary settlement or close its investigation without taking action, according to one of the people familiar with the matter. A decision on how to proceed is probably a few months away, according to the people, who asked to be named because the investigation is confidential.
Moody’s Investors Service is under investigation by the U.S. Justice Department for its actions in advance of the 2008 financial crisis, the Wall Street Journal reported on Sunday, with regulators probing why it issued favorable ratings to mortgage deals that ultimately went bust.
Citing people familiar with the investigation, The Journal said DoJ officials have quietly met with numerous former executives of Moody’s to discuss the agency’s grading of key securities before the crisis. The investigation is in its early stages, and may not yield a lawsuit, the newspaper said, citing unnamed sources.
Still, the DoJ has already targeted Standard & Poor’s Ratings, as well as major banks, for their role in the crisis. According to reports, Justice officials are close to a settlement with S&P.
Former Moody’s analyst, Ilya Kolchinsky, has accused the credit rating powerhouse of overstating its ratings for countless toxic mortgage-backed securities that caused the financial meltdown in 2008, misleading investors and costing the U.S. billions in funds spent bailing out Wall Street’s too-big-to-fail banks. Kolchinsky’s 107-page False Claims Act complaint, filed in 2012, was recently unsealed after the government failed to intervene.
The complaint alleges that from 2004 to 2007, Moody’s issued inflated ratings, often “triple-A,” for the majority of risky residential mortgage-backed securities and collateralized debt obligations it reviewed, as a result of “concealed conflicts of interest and Moody’s reckless profit-maximization policies.” According to Kolchinsky, it wasn’t until October 2007 when the market started its downward turn that Moody’s began downgrading its ratings.
In a whistleblower-protection suit that Kolchinsky dropped last year, he contended that he was demoted and eventually terminated after he came forward with concerns over Moody’s rating policies for high-risk securities. Specifically, that Moody’s rating methods violated federal securities laws and had lied in registration statements to the SEC. Kolchinsky served as managing director of Moody’s derivative group, before being relegated to a diminished role with fewer responsibilities and reduced pay.
Following Kolchinsky’s termination in September 2009, he testified before the U.S. House Committee on Oversight and Government Reform regarding its probe into the role rating agencies played in the financial crisis. Moody’s denied Kolchinsky’s accusations in the media. Regardless of the outcome of the False Claims Act suit or the merits of Kolchinsky’s allegations, we have long thought that the question of whether inflated ratings were issued by credit rating agencies, and the effect on the economic collapse of 2008 seems to have been largely overlooked in the inevitable finger pointing that occurred in its aftermath.
MANHATTAN (CN) – A former manager sued Moody’s in a qui tam complaint, claiming the ratings service cost the federal government billions of dollars by falsely evaluating mortgage-backed securities and collateralized debt obligations before the financial crisis.
Ilya Eric Kolchinsky sued Moody’s on Feb. 24, 2012 in a sealed complaint.
The complaint was unsealed on May 30 this year, after the United States declined to intervene.
According to the 107-page complaint: “Between 2004 and 2007, Moody’s issued credit ratings for tens of thousands of U.S. residential mortgage backed securities (‘RMBS’) and collateralized debt obligations (‘CDOs’). Motivated by Wall Street firms; willingness to pay hundreds of millions of dollars in fees to obtain investment-grade credit ratings, and Moody’s single-minded desire to increase its share of the lucrative and increasingly competitive CDO and RMBS markets, Moody’s issued its highest rating, Aaa, and similarly positive investment grade credit ratings, for the vast majority of those RMBS and CDO securities. Unbeknownst to investors, these ratings were not the product of independent, objective calculations, but rather the result of concealed conflicts of interest and Moody’s reckless profit-maximization policies. Moody’s concealed its profit-driven ratings inflation practices by its certification to the SEC to the contrary – that its rating reflected legitimate practices and policies. Moody’s certifications were a lie.”
Citigroup : Moody’s Dings Citigroup’s Mexican Unit Banamex Over Alleged Fraud — Update
MEXICO CITY– Moody’s lowered its baseline credit and local currency ratings for Citigroup Inc. Mexican banking unit Banamex on Tuesday, while warning that Banamex’s stand-alone bank financial-strength rating could be next as the institution slogs through investigations into bad loans it extended to an oil-services company.
Banamex’s baseline rating was cut one notch, to Baa2, which implies moderate credit risk, to take into account uncertainty stemming from a number of ongoing investigations and reviews by federal and financial authorities both in Mexico and the U.S., as well as Citigroup’s and Banamex’s internal reviews, Moody’s said. Baa2 is two notches above junk-bond status.
Citigroup revealed on Feb. 28 that an alleged fraud by Mexican oil-services provider Oceanografia had cost the bank around $400 million in bad loans. Citigroup Chief Executive Michael Corbat has taken a tough line, vowing to fix internal problems and calling the ordeal a “despicable crime.”
The Mexican Attorney General’s Office charged Oceanografía CEO Amado Yañez Osuna with bank fraud last week. Mr. Yañez and other Oceanografía officials haven’t made any public comments since Mexican authorities seized the company, also on Feb. 28.