Moody's pays $864 million to U.S., states over pre-crisis ratings

[Eugene]

Source: Reuters

BUSINESS NEWS | Fri Jan 13, 2017 | 9:41pm EST

Moody's pays $864 million to U.S., states over pre-crisis ratings

By Karen Freifeld | NEW YORK

Moody's Corp has agreed to pay nearly $864 million to settle with U.S. federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis, the U.S. Department of Justice said on Friday.

The credit rating agency reached the deal with the Justice Department, 21 states and the District of Columbia, resolving allegations that the firm contributed to the worst financial crisis since the Great Depression, the department said in a statement.

"Moody's failed to adhere to its own credit-rating standards and fell short on its pledge of transparency in the run-up to the Great Recession," Principal Deputy Associate Attorney General Bill Baer said in the statement.

S&P Global's Standard & Poor's entered into a similar accord in 2015 paying out $1.375 billion. Standard and Poor's is the world's largest ratings firm, followed by Moody's.

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Read more: http://www.reuters.com/article/us-moody-s-credit-idUSKBN14X2LP

[nitpicker]

1. Link to the DoJ PR

https://www.justice.gov/usao-nj/pr/justice-department-and-state-partners-secure-864-million-settlement-moody-s-arising

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Among other things, Moody’s acknowledges in the Statement of Facts:

•Moody’s published and maintained online its “Code of Professional Conduct” for the stated purpose of promoting the “integrity, objectivity, and transparency of the credit ratings process,” including managing conflicts of interest that it publicly acknowledged arose from the fact that RMBS and CDO issuers determined whether to retain Moody’s to rate these securities.

•Moody’s acknowledges that it passed these conflicts on to the managing directors of the business units, who were then asked to resolve the “dilemma” between maintaining ratings quality and the need to win business from the issuers that selected them.

•Moody’s publicly stated that its ratings “primarily address the expected credit loss an investor might incur,” which included its assessment of both the “probability of default” and the “loss given default” of rated securities.

•Starting in 2001, Moody’s RMBS group began using an internal tool in rating RMBS that did not calculate the loss given default or expected loss for RMBS below Aaa and did not incorporate Moody’s own rating standards. Instead, the tool was designed to “replicate” ratings that had been assigned based on a previous model that calculated expected loss for each tranche and incorporated Moody’s rating level standards. In October 2007, a senior manager in Moody’s Asset Finance Group (AFG) noted the following about Moody’s RMBS ratings derived from the tool: “I think this is the biggest issue TODAY. [A Moody’s AFG Senior Vice President and research manager]’s initial pass shows that our ratings are 4 notches off.”

•Starting in 2004, Moody’s did not follow its published idealized expected loss standards in rating certain Aaa CDO securities. Instead, Moody’s began using a more lenient standard for rating these Aaa securities but did not issue a publication about this practice to the general market.

•In 2005, Moody’s authorized the expanded use of this practice to all Aaa CDO securities and, in 2006, formally authorized the use of this practice, or of an even more lenient standard, to all Aaa structured finance securities. Throughout this period, although “[m]any arrangers and issuers were aware” that Moody’s was using a more lenient Aaa standard, Moody’s did not issue publications about these decisions to the general market.
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