Moody's Fate in Subprime Probe to Be Decided Soon by U.S.

  • Probe is one of Justice Department's last looks at crisis era
  • S&P reached $1.5 billion settlement in 2015 over bond ratings

The U.S. Justice Department will decide in the next few months whether it will sue Moody’s Corp. for allegedly inflating ratings on mortgage bonds at the heart of the 2008 financial meltdown, according to people familiar with the matter.

The multiyear inquiry into Moody’s is among the remaining live investigations into the mortgage lenders, Wall Street banks and ratings firms that the government has sought to hold accountable for the subprime crisis. A year ago, ratings company Standard & Poor’s, a unit of McGraw Hill Financial Inc., paid $1.5 billion to resolve allegations that it had inflated mortgage-bond ratings to gain business during the housing boom. 

Any case against Moody’s would be smaller than the one against S&P because the pool of Moody’s-rated securities at issue is smaller, one of the people said.

The government could sue Moody’s, reach a monetary settlement or close its investigation without taking action, according to one of the people familiar with the matter. A decision on how to proceed is probably a few months away, according to the people, who asked to be named because the investigation is confidential.

Moody’s and the Justice Department declined to comment.

The Justice Department is examining credit ratings that Moody’s assigned during the housing boom and asking whether it skewed its criteria to win business from Wall Street banks that were packaging home loans into securities. Shortly before last year’s S&P settlement, the Justice Department was interviewing former Moody’s executives as part of the investigation, people familiar with the matter said at the time.

Notable E-Mails

One challenge for the government is that the volume of evidence is less than that in the S&P case because Moody’s didn’t retain e-mails for as long as S&P did, one of the people said. The S&P case notably included an internal communication in which S&P employees joked about the company’s willingness to rate deals “structured by cows.”

Moody’s is already contending with lawsuits brought by the attorneys general of Mississippi and Connecticut over credit ratings. It wasn’t clear whether additional states would join the effort as they did against S&P. Some states may be prevented from doing so by statutes of limitations, one of the people familiar with the matter said. 

Ratings companies have been blamed for helping trigger the financial crisis by awarding top grades on bonds backed by subprime mortgages. Downgrades on the securities helped wipe out almost $11 trillion of household wealth, the Financial Crisis Inquiry Commission said in its 2011 report. 

The Justice Department faces its decision in the waning days of the Obama administration, which made a priority of holding Wall Street to account for crisis-era behavior and extracted large fines from several banks.

The Justice Department sued S&P in 2013, accusing the firm of inflating grades and lying about its rankings being free from conflicts of interest. That case was settled in February 2015 with the Justice Department and 19 states and the District of Columbia. S&P didn’t admit wrongdoing.

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