Ohio sues S&P, Moody's, Fitch for misleading ratings
21 November 2009
The attorney general of the US state of Ohio, Richard Cordray yesterday filed charges against leading credit rating agencies yesterday as their false and misleading credit ratings on mortgage-backed securities cost the state $457 million.
The lawsuit, filed in US District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges Standard & Poor's, Moody's Investors Service and Fitch ratings of wreaking havoc on the US financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.
The lawsuit alleges the rating agencies gave many of these exotic investments the highest investment-grade credit rating. This rating – often referred to as ''AAA''– is consistent with the credit ratings given to the safest corporate bonds, and it assured institutional investors, including the Ohio funds, that the investments were extremely safe with a very low risk of default.
According to preliminary estimates, the improper ratings cost the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, state Police and Fire Pension Fund, School Employees Retirement System of Ohio and state Public Employees Deferred Compensation Program, losses in excess of $457 million.
The lawsuit alleges that the rating agencies made spectacularly misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating.
He alleges that public statements and testimony indicate that rating agency executives and analysts knew their ratings of mortgage-backed securities were wrong. Indeed, one rating agency analyst admitted that the market for mortgage-backed securities was ''little more than a house of cards'' with a much higher risk of devaluation than indicated by the purported investment-grade ''AAA'' rating. Another rating agency analyst said that ''we rate every deal. It could be structured by cows and we would rate it.''