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With S&P suit settled, Mississippi set to take on Moody’s over flawed investment ratings

File photo of the Moody's sign on 7 World Trade Center tower in New YorkBy TED CARTER

A recent big-dollar settlement with Standard & Poor’s over misleading ratings put on sub-prime mortgage-backed securities before the 2008 financial collapse has cleared the way for Mississippi and Connecticut to resume a similar case against Moody’s Ratings Service.

The two states put their action against Moody’s on hold during settlement negotiations with S&P that resulted in a Feb. 3 agreement for the investment ratings company to pay $1.375 billion to put the case behind it. Mississippi is to receive $33 million from that settlement, plus an $11.5 million bonus as a “Lead State.” Mississippi was the first to join Connecticut in contesting the objectivity of S&P ratings of mortgage held securities.

The two states make many of the same claims against Moody Corp.’s Investor Services that they made in their S&P filings. In fact, Mississippi’s suit in Hinds Chancery Court names both S&P and Moody’s throughout.

The suit alleges Moody’s Investor Services violated Mississippi’s Consumer Protection Act by selling out its objectivity in exchange for lucrative fees from the same investment banks whose sub-prime mortgages were receiving inflated ratings from Moody’s.

The so-called “structured financial securities” which investment banks sold as safe investments with the help of attractive ratings from the investment ratings agencies are blamed for setting off the  banking and financial crisis that began in 2008. About 90 percent of the ratings for structured securities came from S&P or Moody’s, according to Mississippi’s lawsuit.

“This deception – which includes both affirmative misrepresentations and material omissions – affected Mississippi banks, insurance companies, pension funds and mutual funds that purchased the securities, and all of the consumers in Mississippi whose retirement monies were invested in pension or mutual funds that included these securities,” Attorney General Jim Hood said in the filing.

Further, Hood said, Mississippi government agencies and Mississippi institutional investors used Moody’s Investor Services when determining the capital reserves necessary for banks and insurance companies and assessing the relative health of the entities.

The ratings Mississippi and Connecticut are challenging do not include publicly issued general obligation and revenue bonds. S&P and Moody’s charged investment banks three times more to rate structured financial securities and other speculative securities than it did to rate general obligation and revenue bonds, the suit says.

By “at least” 2006, Moody’s and S&P knew that the models they had been using were deficient and began revising their models, the Mississippi suit claims. However, “they waited at least a year to inform the public… all the while continuing to assert their independence and objectivity as they rated thousands of speculative securities,” the suit says.

Hood cites conclusions of the congressionally created Financial Crisis Inquiry Commission which concluded that the “credit rating agencies were key enablers of the financial meltdown.”

The inquiry commission further found that the mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval, Hood notes.

“Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms,” the commission said.

In the company’s end of year earnings report, President & CEO Raymond McDaniel acknowledged the “heightened scrutiny” Moody’s has been under from a wide range of governmental organizations since the financial crisis. He pledged, however, to keep shareholders informed on developments through “filings and other disclosures to the market.”

In the meantime, Moody’s $3.3 billion in earnings for 2014 represent a 12 percent increase from 2013. Of that total, Moody’s Investor Service accounted for $2.3 billion and Moody’s Analytics $1.1 billion.

“Moody’s expects full year 2015 total revenue to grow in the mid-single digit percent range,” McDaniel said in the 2014 earnings report.

Speaker of the Mississippi House Philip Gunn said Monday that no decision has been made on how the state will use the more than $30 million it will receive from the S&P settlement, though he noted that Mississippi struggles each year to cover its Medicaid costs and this year is no exception.

Hood has asked legislators to allocate the bulk of the settlement to mental health services.

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About Ted Carter

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