Moody’s, the second largest financial rating agency in the world has agreed to settle with the US authorities for their dubious role in the rating of mortgage backed securities that triggered the 2008 financial crisis.
A lengthy and thorough investigation by the US authorities resulted in the settlement. Attorney General George Jepsen said in a statement released on Friday the 13th of January 2017 that Moody’s rating was ‘directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody’s to rate them’.
These securities were bundled and sold in large packages where the buyer could not determine the real value of the securities anymore. Mortgage backed securities that resulted in the US housing crisis have been considered to be the trigger for the global financial meltdown that went on for years afterwards.
The settlement does not come as a surprise. In March 2016, Moody’s already agreed to pay 130 Million USD to the California Public Employees’ Retirement System over allegedly inflated ratings on residential mortgage bond deals. The retirement system invested in what they thought to be relatively safe long term, fixed value commercial paper.
This new settlement includes payments to the US Justice Department, the District of Columbia and twenty-one US states, for the amount of 864 Million USD. Moody’s acknowledged that it had not followed it’s own standards, while not making public that they used different metrics to determine the value of the underlying assets. Principal Deputy Associate Attorney General Bill Bear concluded that ‘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’.
The trend that third parties become joint liable in financial tragedies continues. It is expected that intermediaries and introducers are next in line.