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Category: Globalisation - Economy / International Financial Crisis / Business, Economics and Finance

Moody's to pay $1.1 billion to settle claims it inflated ratings

Saturday, 14 Jan 2017 11:33:30

Moody's acknowledged it didn't follow its own standards in rating the risk of securities backed by home mortgages. (Brendan McDermid: Reuters)

Moody's has agreed to pay nearly $US864 million ($1.1 billion) to settle federal and state claims it gave inflated ratings to risky mortgage investments in the years leading up to the global financial crisis.

Key points:

  • Inflated ratings led to defaults on risky subprime loans
  • Moody's is the world's second largest credit ratings agency
  • Standard & Poor's payed nearly $1.87 billion to settle similar allegations in 2015

The deal announced was struck between the New York-based rating agency, the Justice Department and the attorneys general for 21 states and the District of Columbia.

It calls for $US437.5 million ($583.4 million) to go to the Justice Department and $US426.3 million ($568.5 million) to be divided among the states and the District of Columbia.

Moody's, along with the other two major rating agencies Standard & Poor's and Fitch, were widely criticised for giving low risk ratings to the risky mortgage securities being sold ahead of the crisis, while they reaped lucrative fees.

In the settlement, the world's second-largest credit ratings agency acknowledged that it didn't follow its own standards in rating the risk of securities backed by home mortgages and the collateralised debt obligations that relied on their health.

The system spread the risk of mortgage defaults to banks around the globe and led to a string of financial collapses in 2008 when people began defaulting on risky subprime loans.

"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," Principal Deputy Associate Attorney General Bill Baer said in a statement.

Under the settlement, Moody's agreed to a number of reforms designed to make sure its credit ratings are objective, including separating commercial and credit rating functions, ensure changes to its rating methods are independently reviewed, and ensuring that some employees aren't compensated based on Moody's own financial performance.

The agreement comes two years after the world's largest ratings agency, Standard & Poor's, agreed to pay nearly $US1.4 billion ($1.87 billion) to settle similar allegations by the Justice Department, 19 states and the District of Columbia.

AP

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