Posted on 12 Feb 2013 by Neilson
The New York attorney-general has launched an investigation into the mortgage bond rating practices of major ratings companies as a factor in the 2008 financial crisis, a person close to the investigation has said.
The New York probe will look at the ratings of mortgage securities by Standard & Poor's, Moody's and Fitch. Those ratings have been criticised for being overly positive and downplaying risk to investors ahead of the 2008 crisis.
New York attorney-general Eric Schneiderman has sent a subpoena to S&P and formal information requests to Moody's and Fitch, said the person close to the investigation. The New York action comes on the heels of a lawsuit filed earlier this week by the Department of Justice against S&P.
The United States accused S&P of knowingly inflating its ratings on collateralised debt obligations and residential mortgage-backed securities in 2007 in order to win revenue from issuers. S&P has called the suit meritless and pledges to fight the case. The US suggested it would seek at least $5 billion from S&P in civil damages.
Any enforcement by New York state could face a hurdle following a June 2008 settlement between the companies and Schneiderman's predecessor, Andrew Cuomo, that cleared the ratings firms of additional enforcement in exchange for abiding by a number of provisions.
The 2008 settlement is not a public document, but Cuomo issued a news release laying out some of the measures agreed by the rating firms. They include reforms on the fee structure charged on investment banks and additional disclosure. The New York attorney-general could proceed with enforcement against the rating firms if the probe shows the firms violated the terms of the 2008 agreement, said the person close to the New York probe. An S&P spokeswoman declined to comment on the New York probe.
Moody's chief executive Ray McDaniel suggested the New York probe was a routine regulatory matter. He told analysts on a conference call that Moody's responds to regulator queries on an 'ongoing basis'. A Fitch spokesman didn't immediately respond to a message.
Their investigations threaten the McGraw-Hill unit with broader litigation after the Justice Department sued the company this week with 13 states and the District of Columbia. Connecticut, Illinois and Mississippi had earlier filed lawsuits. "We'll likely see other state attorneys general joining the fray and jumping in on these lawsuits," said Robert Mintz, an attorney at McCarter & English and a former federal prosecutor. "Whenever you have company like S&P that does business around the country, it gives each individual state a bite at the apple."
Connecticut attorney-general George Jepsen, who is leading the multistate coalition, said in an interview that additional states are "actively considering" filing lawsuits. He declined to comment on how many.
S&P rated more than $2.8 trillion worth of residential mortgage-backed securities and almost $1.2 trillion worth of collateralized debt obligations from September 2004 to October 2007, according to the complaint. Federally insured financial institutions suffered $5 billion in losses on CDOs rated by S&P, the Justice Department said in a statement.
S&P called the US and state lawsuits 'meritless' and said its ratings reflected the company's best judgments, according to a statement.
California attorney-general Kamala Harris claimed in the lawsuit that two public pension funds relied on S&P's ratings.