Moody’s Corporation (MCO) Reaches $864M Settlement Over Pre-Crisis Era Inflated Subprime Ratings

Moody’s Corporation has agreed to pay nearly $864 million to settle federal and state claims over its role in the 2008 financial crisis. The credit ratings agency, along with its peers Standard & Poor’s and Fitch, was widely criticized for giving inflated ratings to risky mortgage-backed securities and collateralized debt obligations (CDOs) in the years leading up to the crisis.

The settlement, announced by the U.S. Department of Justice (DoJ) on Friday, resolves pending lawsuits in 21 states and the District of Columbia. Under the terms of the agreement, the company will pay $437.5 million to the DoJ, while the remaining $426.3 will be divided among the states and the District of Columbia.

“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,” Bill Baer, a principal deputy associate attorney general, 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 sale of subprime mortgage-backed CDOs was the leading cause of the 2008 financial crisis — the worst one since the Great Depression. As part of the agreement, Moody’s — currently the world’s second-largest credit ratings agency — acknowledged that it had used a more “lenient” standard for rating these securities, and that it failed to follow its own published methods.

“Moody’s touted a particularly robust analytical framework for rating RMBS [Residential Mortgage Backed Securities] and CDOs,” U.S. Attorney Paul J. Fishman for the district of New Jersey, said in the statement. “Moody’s now admits that it deviated from its methodologies and failed to disclose those changes to the public. 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.”

The agreement comes almost two years after Standard and Poor’s — the world’s largest credit ratings agency — settled similar allegations by the DoJ, 19 states, and the District of Columbia for nearly $1.4 billion. However, the heftiest fines and penalties related to the financial crisis have been levied on the world’s biggest banks, which have been, over the past eight years, forced to shell out over $160 billion.