New York Attorney General Eric Schneiderman has begun examining America's biggest credit rating agencies' compliance with agreements reached by his predecessor, Gov. Andrew Cuomo, that ended an investigation into mortgage-backed securities.
The mid-2008 agreements, imposing no financial penalties, required Moody's Investors Service, Standard & Poor's and Fitch Inc. to publicly disclose due diligence and evaluation criteria. They also required partial upfront payments to prevent banks from simply buying the better ratings for those securities.
With that market already collapsed, the agencies say they weren't rating new mortgage-backed securities. The 42-month agreements have expired.
An official with knowledge of the investigation, who was not authorized to speak publicly, said a subpoena this week went to S&P and information requests to Moody's and Fitch. Under the agreement, then-Attorney General Cuomo agreed to "terminate all current investigation" and "not institute any action" against the agencies. They admitted no wrongdoing but agreed to cooperate with the attorney general's ongoing probe into the mortgage industry and adopt reforms.
The official noted there appeared to be little effort to monitor compliance and they are looking into whether violations would enable the office now to take another look at alleged misconduct in securities ratings that contributed to the collapse of financial markets.
S&P spokesman Edward Sweeney and Fitch's Daniel Noonan declined comment Friday.
At an earnings conference call Friday, when asked about the New York probe, Moody's chief executive Raymond McDaniel said that the company from time to time gets requests for information from parties that include state attorneys general and that they cooperate with them.
Fitch did not immediately respond to a request for comment.
The U.S. Justice Department this week filed civil charges against S&P, accusing the rating agency of refusing to warn investors that the housing market was collapsing in 2006 because it would be bad for business. The department is seeking $5 billion in penalties.
S&P, a unit of New York-based McGraw-Hill Cos., called the lawsuit meritless and said, "Claims that we deliberately kept ratings high when we knew they should be lower are simply not true."
The federal Financial Crisis Inquiry Commission in concluded in its final report two years ago that the 2007-2008 market upheaval, followed by national recession, came from a decade of "pervasive permissiveness" by regulators with expanding debt and high-risk behavior by home buyers and owners, mortgage lenders, investors and financial institutions that repackaged and resold that debt.
Its root was mortgages issued to people who could not afford them. The three ratings agencies, paid from $250,000 to $500,000 to grade each collateralized debt obligation, "were essential cogs in the wheel of financial destruction," the report said.
That secondary market was rocked as the housing boom ended, more borrowers defaulted and thousands of AAA-rated securities based on those debt obligations tumbled.
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