Ratings firms facing New York probe

SINGLED OUT?:On top of the investigation by New York, S&P are being sued by the US Department of Justice over ratings which may have contributed to a financial crisis

Bloomberg

Sat, Feb 09, 2013 - Page 15

Moody’s Investors Service, Standard & Poor’s (S&P) and Fitch Ratings are being investigated by the New York attorney general over whether they breached a 2008 settlement with the state, a person familiar with the matter said.

The companies reached an agreement with then-attorney general Andrew Cuomo that required them to adopt changes to their operations.

New York Attorney General Eric Schneiderman is probing whether they complied with the agreement, said the person, who was not authorized to speak publicly about the probe and asked not to be identified.

The US Department of Justice and state attorneys general this week sued S&P, accusing the company of inflating ratings on mortgage-backed securities during the housing bubble. New York was not one of the states that sued.

Michael Adler, a Moody’s spokesman, and Dan Noonan, a Fitch spokesman, did not immediately respond to e-mails on Thursday after regular business hours seeking comment about the New York probe.

Catherine Mathis, a spokeswoman for S&P, declined to comment on the probe.

New York’s investigation was reported earlier by the Wall Street Journal.

In the 2008 deal with Cuomo, the companies agreed to change the way they were paid to rate mortgage-backed securities and to disclose more information about their process, including whether an issuer sought, and then decided not to use, ratings from a certain company.

Meanwhile, the Department of Justice’s decision to sue S&P has investors asking why Moody’s and Fitch were not targeted for awarding the same top grades to troubled mortgage bonds and other debt securities.

“What purpose does it serve for the US government to bring an action against S&P at this point in time? On the surface, is this a bid for some sort of retribution” for the company’s 2011 downgrade of the US, Bonnie Baha, head of global developed credit at Los Angeles-based DoubleLine Capital LP, which oversees about US$53 billion, said in a telephone interview on Thursday.

“Moody’s and Fitch assigned the same ratings to these transactions. Why aren’t they named as well?” she added.

The US Financial Crisis Inquiry Commission and a US Senate panel laid the blame on S&P, Moody’s and Fitch for inflated ratings on mortgage-backed securities and collateralized debt obligations (CDOs) that helped cause the worst financial crisis since the Great Depression.

Together, they provided 96 percent of all ratings for governments and companies in the US$42 trillion debt market in 2011.

The US Department of Justice’s case “looks rather suspicious” because Moody’s is not involved, said Peter Wallison, co-director of the Washington-based American Enterprise Institute’s program on financial policy and a member of the inquiry commission.

“It’s very hard to see how Moody’s was doing anything differently than S&P,” he said in a telephone interview on Thursday.

S&P has used this as a defense. Floyd Abrams, the Cahill Gordon & Reindel LLP lawyer representing the company, on Tuesday said on Bloomberg Television that investors required two ratings on CDOs before they would buy.

“And yet we find ourselves now being accused of acting in bad faith, while everyone else acted in good faith, presumably,” he said on the Lunch Money program.

He said on CNBC the same day that the justice department’s investigation intensified after the S&P downgrade, though he did not know if there was a direct link.

“No one in the government has come to me and said: ‘That’s why we did it,’” Abrams said.

Ed Sweeney, an S&P spokesman, declined to elaborate on Abrams’s comments.