BOSTON – The national credit rating agency Moody’s Corporation, Moody’s Investors Service, Inc., and Moody’s Analytics, Inc. (Moody’s) will pay $12 million to Massachusetts to resolve allegations that they acted deceptively and failed to use accurate and appropriate standards when rating certain securities tied to subprime mortgages, Attorney General Maura Healey announced today.
The Massachusetts Attorney General’s Office, the Department of Justice, 21 other states and the District of Columbia entered into the agreement totaling nearly $864 million. The settlement concerns Moody’s rating practices for residential mortgage loan securities at the center of the financial crisis.
“The white-washing of subprime mortgage securities by credit rating agencies helped push the housing market off a cliff,” said Attorney General Healey. “Nearly a decade later, our work to combat predatory and unlawful practices by mortgage originators, investment banks, and other financial firms remains central to our work protecting consumers in Massachusetts.”
After the financial crisis, AG Healey’s Office, along with its federal and state partners, began an investigation into Moody’s conduct as a rater of securities that packaged mortgage loans. Moody’s provided what it touted as independent and objective analyses and ratings for the projected performance of investment vehicles based on pools of mortgages. These included residential mortgage-backed securities (RMBS) backed by subprime mortgages, and collateralized debt obligations (CDOs) which derive their value from the monthly payments consumers make on their mortgages.
Despite repeated public statements emphasizing its independence and objectivity, Moody’s allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients and assigned credit ratings to risky assets packaged and sold by the Wall Street investment banks that failed to disclose the risks posed by those securities. This alleged misconduct began as early as 2001 and became particularly acute between 2004 and 2007.
Among other things, Moody’s altered its process for computing its ratings without informing its customers that the system was changed. As a result of Moody’s changes, the securities that Moody’s rated appeared less risky than they actually were, and this allowed the sale of toxic securities that ultimately contributed to the financial crisis.
Moody’s knew or should have known that its ratings models and methods were inappropriate. For instance, relating to one set of changes, a January 2007 internal Moody’s memorandum noted that certain Moody’s assumptions were “NOT correct” and suggested avoiding referring to them when discussing Moody’s methodology with outsiders.
The AG’s investigation also found evidence that Moody’s gave in to pressure from securities issuers who were paying Moody’s to rate the securities. The banks needed Aaa ratings in order to sell these securities to institutional investors, such as pension plans and retirement plans.
In addition to the monetary settlement, Moody’s has agreed to abide by new compliance practices that include restrictions on how it compensates certain employees, enhancements to oversight, and analyst training.
The Massachusetts AG’s Office has been a national leader in holding banks and financial services firms accountable for their role in the economic crisis, including investigating and holding Wall Street securitization firms accountable for their role in the subprime mortgage crisis.
This case and the implementation of the settlement in Massachusetts are being handled by Assistant Attorneys General Peter Leight, Jenna Snow, and Glenn Kaplan of the Attorney General’s Insurance and Financial Services Division.