Moody’s has agreed to pay $864m to settle allegations that it inflated the credit ratings of subprime mortgage bonds that contributed to the 2008 financial crisis, the Department of Justice said on Friday.
The settlement with the rating agency includes a $437.5m federal civil penalty to the US government — the second-largest payment of this type ever by a rating agency — and ends an investigation carried out by the DoJ and US Attorney’s Office for the District of New Jersey.
The remaining amount will be split between 21 states and the District of Columbia.
“People making decisions on how to invest their money thought they could rely on the ratings Moody’s assigned to these products,” said Paul J. Fishman, US attorney for the District of New Jersey. “When securities are not rated openly and honestly, individual investors suffer, as does confidence in all parts of the financial sector.”
The deal also settles pending state lawsuits, resolving allegations the company misled investors through inaccurate credit ratings for mortgage-backed securities at the heart of the financial crisis.
“Moody’s determined that the agreement, which removes significant legacy legal risk and avoids costs and uncertainty associated with continued investigations and litigations, is in the best interest of the company and its shareholders,” the company said in a statement. “Moody’s stands behind the integrity of its ratings, methodologies and processes, and the settlement contains no finding of any violation of law, nor any admission of liability.”
The settlement is smaller than the $1.375bn that rival rating agency S&P Global reached in February 2015 to resolve allegations that it had defrauded investors in mortgage-backed securities, which came in addition to a $125m settlement it reached with public pension fund California Public Employees’ Retirement System.
Residential mortgage-backed securities bundle up home loans before slicing up the total into “tranches” and offering investors different returns based on the amount of risk they take.
As part of the settlement, Moody’s agreed that it failed to live up to its own ratings methodology when rating RMBS, saying at the time it would carry out certain credit analysis that did not happen.
In October 2007, a senior manager at Moody’s said the tool being used at the time to derive RMBS ratings was the “biggest issue” and that ratings could be as much as “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 Bill Baer, principal deputy associate attorney-general at the DoJ.
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