Moody’s CDO Grades in S&P Lawsuit Almost ‘Identical,’ Study Says

Moody’s Corp., the second-largest credit rating firm, issued “virtually identical” grades on the same structured products that compelled the Justice Department to sue its main competitor, Standard & Poor’s, according to researcher Height Analytics LLC.

“Given that the ratings between S&P and Moody’s were identical, a loss by S&P would create significant uncertainty for Moody’s regarding whether the Department of Justice would take action against it also,” Edwin Groshans, a managing director, at the Washington-based equity research firm, wrote in a report yesterday.

Moody’s, which hasn’t been sued for fraud, has been under investigation by the Justice Department since at least July


The Justice Department sued S&P, the world’s largest credit ratings company, Feb. 4 alleging it inflated ratings on mortgage-backed securities and collateralized debt obligations to win business from Wall Street banks. The U.S. is seeking $5 billion in penalties, or the equivalent of more than five years of profit.

For the CDOs listed in the lawsuit, S&P and Moody’s rated every tranche of collateralized debt obligations the same, according to the report. Both companies’ initial downgrades of the securities took place no more than a month apart from each other, the report said.

CDOs pool assets such as mortgage bonds and package them into new securities with varying risks in which revenue from the underlying bonds or loans are used to pay investors.

‘Similar Claims’

“We don’t have any knowledge of any pending complaint by the Department of Justice raising similar claims against Moody’s,” Raymond McDaniel, Moody’s chief executive officer, said on a Feb. 8 conference call.

Michael Adler, a spokesman for Moody’s, and Ed Sweeney, a spokesman for S&P, declined to comment on the Height report.

“The S&P ratings for the CDOs at issue in this lawsuit are identical to the ratings issued by other rating agencies. So we don’t have an explanation and you’ll have to ask the Department of Justice,” Kenneth Vittor, McGraw-Hill’s general counsel, said during a Feb. 12 conference call.

Shares of McGraw Hill, which have lost 12 percent in value since the lawsuit, are “uninvestable” given the uncertainty surrounding the case, Groshans wrote. They closed at $51.37 in U.S. composite trading yesterday.