Moody’s faces a Department of Justice probe into its ratings of securities during the financial crisis, the ratings agency disclosed Friday.
In regulatory filings, Moody’s told investors that it had received notice from the Justice Department in September that it was preparing a civil complaint against the company for violating federal laws with the ratings it gave mortgage-backed securities and other securities tied to the housing market prior to the 2008 financial crisis.
The Justice Department told Moody’s that its investigation was ongoing and may broaden in scope. Additionally, Moody’s said, “a number” of state attorneys general warned them that they were preparing claims against the firm.
Erroneous triple-A ratings for securities backed by bad mortgages was a key cause of the financial crisis, according to the Financial Crisis Inquiry Commission tasked by Congress with investigating the crash.
Last year, the ratings agency Standard & Poor’s settled with the Department of Justice and state attorneys for $1.4 billion to resolve inquiries into its role in the crisis.
The 2010 Dodd-Frank financial reform law, signed by President Obama, included provisions intended to prevent inflated ratings. The rules, approved by regulators in 2014, implemented some standards to prevent ratings analysts from being influenced by the companies whose securities they are rating, as well as to slow the “revolving door” between ratings agencies and corporations.
Sen. Al Franken, D-Minn., who authored the provision of the law pertaining to ratings agencies, welcomed Friday’s news. In a statement, Franken said that “at the heart of the crisis was an inherent conflict of interest between credit rating agencies—like Moody’s, Fitch, and S&P—and big financial institutions like banks. We can’t let Wall Street be above the law, which is why I wrote legislation to rein in these rating agencies and end their scheming.”
