Moody's pays out millions over misleading credit ratings in run-up to financial crash

The world's second largest credit ratings agency has reached a settlement worth over €812m with the US Justice Department

Moody's pays out millions over misleading credit ratings in run-up to financial crash

File Photo, Moody's Corporation signage, 24-Aug-2010. Image: Mark Lennihan AP/Press Association Images

Credit ratings agency Moody's has agreed to pay nearly €812 million euro in a settlement with US authorities over its ratings of risky mortgage securities in the run up to the global financial crash in 2008.

The US Justice Department has announced that the agency reached the deal to resolve allegations that it contributed to the worst financial crisis since the Great Depression.

"Moody's failed to adhere to its own credit-rating standards and fell short on its pledge of transparency in the run-up to the Great Recession," Principal Deputy Associate Attorney General Bill Baer said in a statement.

"Today’s settlement contains not only a significant penalty and factual admissions of its conduct, but also a commitment by Moody’s to new and continued compliance measures designed to ensure the integrity of credit ratings going forward."

The agreement follows an investigation lasting several years.

Moody’s is not the first ratings agency to reach a settlement with US authorities.

The world’s largest ratings firm, Standard and Poor’s entered into a similar agreement in 2015 - paying out €1.29bn.

As part of yesterday’s settlement Moody’s has agreed to pay a €411.05m penalty to the Justice Department with the remaining €400.53m set to be split among the 21 states involved in the investigation - as well as the district of Columbia.

As part of the settlement, Moody's has acknowledged key aspects of its misconduct and agreed to  a number of measures designed to ensure the integrity of credit ratings going forward - including keeping analytic employees out of commercial-related discussions.

The rating agency's chief executive also must certify compliance with the measures for at least five years.

Moody’s has acknowledged that there were conflicts of interest in the so-called "issuer pay" model - under which ratings agencies are selected by entities that stand to benefit from higher credit ratings.

"Our investigation revealed, and Moody’s has now acknowledged, that Moody’s used a more lenient standard than it had itself published," said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.

"Investors relied on Moody’s credit ratings to be objective and independent, and they naturally expected Moody’s to follow its own published methods."

"Moody’s now admits that it deviated from its methodologies and failed to disclose those changes to the public,” said U.S. Attorney Paul J. Fishman for the District of New Jersey.

“People making decisions on how to invest their money thought they could rely on the ratings Moody’s assigned to these products.

“When securities are not rated openly and honestly, individual investors suffer, as does confidence in all parts of the financial sector."

Following the settlement, Moody's said that it stands behind the integrity of its ratings and noted that the settlement contains no finding of a violation of law or admission of liability.

The agency said it has already implemented some of the compliance measures in the agreement.

Moody's shares closed at €91.10 on Friday.

The stock plummeted more than 5% on Oct. 21st - the day news broke concerning Justice Department plans to sue the agency over the ratings.