Moody's Investors Service chief executive told investors Friday he is unaware of plans by federal and state officials to sue the company for allegedly misleading investors in the run-up to the housing crisis.
"We don't have any knowledge of any impending complaint by the Department of Justice raising similar claims against Moody's," said Raymond McDaniel, referring to a lawsuit on Tuesday by the government against Standard & Poor's, a unit of McGraw Hill.
The comment follows a report late Thursday by Reuters that Moody's may be the next ratings agency to be sued by the U.S. government, which has charged S&P with defrauding investors by inflating ratings on mortgage-backed securities and collateralized debt obligations over a three-year period beginning in 2004.
A Justice Department spokesman did not respond immediately to a request for comment.
Moody's has said it is answering inquiries from varied state attorneys general in connection with "events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last several years," according to the company's latest quarterly filing with the U.S. Securities and Exchange Commission.
McDaniel note that Moody's has not been named in the government's lawsuit against S&P and said his company has been "as responsive as we can be" in responding to requests for information from state attorneys general.
He added that Moody's has "done everything we have been asked to do" by a settlement Moody's, S&P and Fitch reached in 2008 with then-New York Attorney General Andrew Cuomo. As part of the pact, the ratings agencies agreed to establish criteria for reviewing individual mortgage lenders and the lender's origination processes. The agencies also agreed to change how they are paid by investment banks for rating securities backed by residential mortgages. Under the revised fee structure, the agencies are compensated by investment banks for rating a security regardless whether the bank ultimately uses the rating.
The reforms aimed to change practices that public officials have alleged fueled the financial crisis. A series of downgrades by the agencies in 2007, as homeowners whose mortgages backed securities fell behind on their payments en masse, forced banks and other investors to sell off their holdings that had lost investment-grade status, according to a report published by the Senate Permanent Subcommittee on Investigations in 2011.
The downgrades "precipitated the collapse of the RMBS and CDO secondary markets, and perhaps more than any other single event triggered the beginning of the financial crisis," the subcommittee wrote.
For its part, S&P said Tuesday that charges by the Justice Department and states against the ratings agency lack merit and that it intends to defend itself vigorously against the claims.
