The three major credit ratings agencies gave mortgage-backed securities unjustifiably high ratings in return for lucrative fees, losing at least $457 million for five Ohio public employee pension and retirement funds, the state's attorney general alleged in a lawsuit filed Friday.
Ohio is the second state whose public pension funds have pursued credit rating agencies, after the California Public Employees' Retirement System sued the agencies in July alleging they caused it more than $1 billion in losses.
Ohio Attorney General Rich Cordray said Friday evidence showed that Moody's Investors Service, Fitch Ratings, and Standard & Poor's knew that mortgage-backed securities _ in which mortgages were sliced and packaged into securities for investors _ were much riskier than the top ratings they gave them.
But because those seeking the specific rating could shop around until they received that rating, rating agencies had a significant financial incentive to give the highest rating so they wouldn't lose market share, Cordray said.
As the housing market tumbled, shrinking home values and foreclosures triggered a meltdown in the mortgage-backed securities that spread to investors around the globe.
"The credit rating agencies sold out, and they sold us out," Cordray said. "They traded in their objectivity, and in exchange received massive profits. As a result, Ohio police officers, firefighters, teachers, government workers, investors, and retirees of all stripes suffered terrible losses."
Standard & Poor's, which is owned by McGraw-Hill Cos., said a recent Securities and Exchange Commission review of the credit agencies' business practices found no evidence it was issuing ratings for any financial gain. The report, however, found that significant aspects of the agencies' ratings process were not always disclosed, and none of the agencies had specific written policies for rating mortgage-backed securities.
"We believe the (Ohio) claim has no legal or factual merit and we intend to defend ourselves vigorously against it," said Steven Weiss, vice president of corporate communications for McGraw-Hill.
Moody's also said Cordray's lawsuit had no merit.
"Our ratings were and continue to be based on clearly defined and publicly disclosed methodologies," said spokesman Mike Adler. "It's unfortunate that the attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption."
A message seeking comment was left with Fitch Ratings.
Cordray campaigned on a pledge to pursue action against Wall Street when he was running for attorney general last year. He is also heading up a large class-action lawsuit filed in September that claimed Bank of America executives improperly concealed billions in losses and bonuses paid by Merrill Lynch before a shareholder vote on their proposed merger, leading to possibly billions in losses for the state's two largest public pension funds.
Cordray alleged the agencies' artificially high ratings cost the Ohio Police and Fire Pension Fund $83 million; the Ohio Public Employees Retirement System $222 million; the State Teachers Retirement System $85 million; School Employees Retirement System $48 million; and Public Employees Deferred Compensation Program $19 million.