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Connecticut Attorney General's OfficePress Release

Attorney General Sues Credit Agencies For Tainted Ratings That Enabled FinancialMeltdown

March 10, 2010Attorney General Richard Blumenthal today sued two of the nation’s largest credit ratingagencies -- Moody’s and Standard & Poor’s -- for knowingly assigning tainted credit ratings to riskyinvestments backed by sub-prime loans. Blumenthal said Moody’s and S&P’s alleged misconduct enabled the worst economicdownturn in the nation since The Great Depression. The lawsuits,unique and unlike others filed on behalf of specific investors or pension funds,are sovereign enforcement actions brought under the Connecticut Unfair Trade Practices Act. Despite repeated statements emphasizing their independence and objectivity when ratingstructured finance securities, Moody’s and S&P knowingly failed to live up to their representations.In particular, their ratings on structured finance securities were tainted by their desire to earnlucrative fees.Moody’s and S&P knowingly catered to the demands of investment banks and other largeissuers of structured finance securities in order to increase their own revenues. As a result, manystructured finance securities that contained a great deal of credit risk undeservedly received

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Moody’s and S&P’s highest ratings, Blumenthal alleges. “These credit rating agencies gave the best ratings money could buy -- catering to theirpowerful investment bank clients, rather than objectively rating risky bonds,” Blumenthal said.“Countless investors and others -- including individuals, banks, mutual funds, insurance companies,hedge funds and pension funds -- were misled into believing that these credit ratings wereindependent and objective, and lost money on investments they might have avoided if told the truth. “Moody’s and S&P violated public trust -- resulting in many investors purchasing securitiesthat contained far more risk than anticipated and that have ultimately proven to be nearly worthless. “The results have been catastrophic -- crippling the entire economy. Today’s lawsuit seeksan order stopping Moody’s and S&P from deceiving consumers, as well as civil penalties anddisgorgement of ill-gotten profits.” Structured finance securities have been the centerpiece of the national financial crisis. Theyare financial products whose value is derived from a stream of revenue flowing from a pool ofunderlying assets -- assets most commonly backed by residential mortgages, including subprimemortgages. They can also be backed by other assets such as student loans and credit cardbalances. Moody’s and S&P dominate the ratings market for structured finance securities -- and areresponsible for rating virtually all structured finance securities issued into the global capital markets. Investors and other market participants rely on Moody’s and S&P to fulfill their statedpromise of independence and objectivity. In Moody’s own Best Practices Handbook, the company claims: “We serve investors byproviding them with timely credit research and independent, thoughtful, and accurate rating opinionson which they can base their investment decisions.”

Both Moody’s and S&P have secretly defied their public promises and legal duty to provideindependent and objective ratings, Blumenthal said. This was not always the case. At one time, Moody’s and S&P refused payments from -- oreven to meet with -- issuers of a security it rated. The companies’ business models haveincreasingly shifted, however, so that a vast majority of their fees are now paid by issuers. As one of Moody’s former vice presidents publicly noted, “Starting in 2000 there was asystematic and aggressive strategy to replace a culture that was very conservative, an accuracyand quality oriented culture, a getting the rating right kind of culture, with a culture that wassupposed to be business friendly but was consistently less likely to assign a rating that was tougherthan our competitors.” Blumenthal said Moody’s and S&P’s lack of independence and objectivity, violating theConnecticut Unfair Trade Practices Act, has manifested itself in several ways, including: Moody’s and S&P modified rating methodologies to make more money: In short, in directcontrast to their public representations, and unbeknownst to investors and other marketparticipants, Moody’s and S&P’s rating methodologies were directly influenced by a desire toplease their clients and enhance their own revenue. Assessing actual credit risk was ofsecondary importance to revenue goals and winning new business. Ratings shopping: Issuers unhappy with a credit rating agency’s initial analysis can attemptto influence the process by informing the rating agency of a more desirable rating that one ofits competitors is willing to assign. As a result, the rating agency knows that it must meet itscompetitor’s rating or forgo the revenue altogether. Both Moody’s and S&P knuckled under tothis pressure and allowed it to influence the ratings they assigned to structured financesecurities. Despite public representations of vigilant monitoring of conflicts of interest inherent to theIssuer Pays business model, Moody’s marginalized its own compliance departments andeven punished employees who raised concerns about its lack of independence and