The U.S. Department of Justice has announced
that Moody’s will pay $864 million to settle charges related to problematic credit ratings on residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) in the seven years leading up to the 2008 economic meltdown. The settlement will also resolve pending litigation brought against the company by three states and potential claims from 18 states and the District of Columbia.
The settlement involves Moody’s Corporation and two of its subsidiaries, Moody’s Investors Service Inc. and Moody’s Analytics Inc. In the settlement, Moody’s acknowledges there were significant conflicts of interest starting in 2001, when the company began to value repeat business from RMBS and CDO issuers over its standards in maintaining ratings accuracy. The situation devolved to the point that a 2007 internal memo included a warning that “our ratings are 4 notches off.”
"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," said Principal Deputy Associate Attorney General Bill Baer. "Today’s settlement contains not only a significant penalty and factual admissions of its conduct, but also a commitment by Moody’s to new and continued compliance measures designed to ensure the integrity of credit ratings going forward."
"Our investigation revealed, and Moody’s has now acknowledged, that Moody’s used a more lenient standard than it had itself published," said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. "Investors relied on Moody’s credit ratings to be objective and independent, and they naturally expected Moody’s to follow its own published methods."
The settlement includes a $437.5 million federal civil penalty, which is the second largest ever made to the federal government by a ratings agency, with the remaining funds divided among the settlement’s member states: Arizona, California, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Washington plus the District of Columbia.