MADIGAN, DOJ & STATES ANNOUNCE $864 MILLION SETTLEMENT WITH MOODY'S INVESTORS SERVICE
Madigan, DOJ & States Reach Settlement with Moody's for Misleading Investors in Lead Up to Economic Collapse
Chicago — Attorney General Lisa Madigan today announced an $864 million settlement with Moody's Corporation, Moody's Investors Service Inc. and Moody's Analytics Inc. to resolve allegations that the credit ratings agency compromised its independence and objectivity in assigning its highest ratings to risky mortgage-backed securities and other structured finance securities in the lead up to the 2008 economic collapse.
Illinois will receive $19.5 million under the joint state-federal settlement forged by the U.S. Department of Justice (DOJ), Madigan and 21 other attorneys general with Moody's, one of the nation's largest credit ratings agencies responsible for independently rating risk on behalf of clients and investors.
"Moody's conduct directly contributed to our country's economic collapse," Madigan said. "Moody's did not do its job and lured state pension funds into risky mortgage-backed securities. The settlement with Moody's is the latest effort in my commitment to recover critical funds for the state due to Wall Street's corruption and greed."
According to the settlement, Moody's consistently made misrepresentations about the processes it used to assign credit ratings to structured finance securities. While publicly promising independent, objective analyses, the company privately relaxed its ratings criteria to ensure its clients' residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) would achieve higher ratings than the actual quality of the assets supported. Structured finance securities, including RMBS and CDOs, derive their value from the monthly payments consumers make on their mortgages. The alleged misconduct began as early as 2001 and became particularly rampant between 2004 and 2007.
Specifically, Moody's represented to consumers that its Aaa rating carried a specific level of risk, and the investigation found evidence that Moody's altered its process so that the Aaa rating represented a greater risk than Moody's disclosed to investors and consumers. The investigation also found evidence that Moody's gave in to pressure from big banks, which were powerful and repeat customers that paid Moody's millions of dollars to rate these securities.
Mortgage-backed securities are financial products made up of a pool of mortgages that are bundled together and sold as a security. The assets are backed by residential mortgages, including subprime mortgages. The performance of these investment products have significant, real-world implications for Illinois institutional investors, such as pension funds and 401(k) managers that make decisions about whether, and which, of these securities are appropriate investments. It was the misrepresentation of the true risk of these mortgage securities that helped the housing market skyrocket and ultimately led to its collapse in 2008.
In addition to the monetary settlement, Moody's has agreed to: 1) a detailed statement of facts in connection with the way it rated RMBS and CDOs leading up to the financial crisis, and 2) significant compliance terms, including an annual certification by the CEO of Moody's Corporation, which will be provided to Illinois every year for the next four years, certifying that Moody's is following certain compliance requirements.
The Moody's settlement is the latest in a long line of enforcement actions Madigan has taken against banks, lenders and other contributors of the financial crisis. As a result of all of Madigan's enforcement actions, she has recovered more than $3 billion for Illinois homeowners, communities, pension funds and county recorders.
Joining Madigan and DOJ in today's settlement were attorneys general from: Arizona, California, Connecticut, Delaware, District of Columbia, Idaho, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Washington.
Consumer Protection Division Chief Deborah Hagan, Consumer Protection Chicago Bureau Chief Susan Ellis, Supervising Attorney Vaishali Rao and Assistant Attorneys General Vijay Raghavan and Andrea Law handled the case for Madigan's office.