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January 13, 2017

Moody’s Pays Iowa $9 Million for Inflating Investment Ratings that Worsened 2008 Financial Crisis

Iowa part of nearly $863 million joint settlement with 20 other states and DC, U.S. Justice Department

DES MOINES – Moody’s Investor Service and two affiliated companies will pay the state approximately $9 million as part of a nearly $863 million joint federal-state settlement over allegations the credit-rating firm inflated ratings of mortgage-backed securities leading up to the nation’s 2008 financial crisis.

The settlement with Attorney General Tom Miller is part of a broader settlement with the U.S. Department of Justice, 20 other states, and the District of Columbia. The companies include Moody’s Corporation, Moody’s Investor Service Inc., and Moody’s Analytics Inc.

The landmark settlement is the culmination of an investigation into Moody’s conduct and its representations of independence and objectivity in the rating of structured finance securities.  Structured finance products, including residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.  These securities, particularly those backed by subprime mortgages, were at the center of the 2008 financial crisis.

“The 2008 housing collapse was amplified by Moody’s putting its own profits ahead of the interests of investors it claimed to serve,” Miller said. “We are holding Moody’s accountable for harming investors and our economy.”

Despite repeated statements emphasizing its independence and objectivity, Moody’s skewed its analyses to gain business and profits from investment bank clients. Moody’s assigned inflated credit ratings to toxic assets that were packaged and sold as securities by Wall Street investment banks.

The conduct enabled investors, including institutional investors who sought low-risk investments—such as pension plans and retirement plans—to buy securities backed by subprime loans that were, in fact, high-risk. When these investments collapsed, it deepened the nation’s financial crisis and cost investors billions.

This alleged misconduct began as early as 2001, and intensified from 2004-2007.

Moody’s represented to consumers that its Aaa rating carried a specific level of risk, and the investigation found evidence that Moody’s altered its process so that the Aaa rating represented a greater risk than Moody’s disclosed to investors and consumers.  The probe also found evidence that Moody’s gave in to pressure from big banks, which were powerful, repeat customers that paid Moody’s millions to rate these securities.  The banks needed Aaa ratings in order to sell these securities to certain investors.

In addition to the monetary settlement, Moody’s has agreed to a detailed statement of facts in connection with the way it rated certain structured finance securities leading up to the financial crisis. Moody’s also agrees to additional requirements, including certifying its settlement compliance annually for four years.

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