Indiana will receive $12.77 million from Moody’s Corp., which has agreed to pay nearly $864 million to settle federal and state claims it gave inflated ratings to risky mortgage investments in the years leading up to the financial crisis.
The deal announced Friday was struck among the New York-based rating agency, the Justice Department and the attorneys general for 21 states and the District of Columbia.
It calls for $437.5 million to go to the Justice Department and $426.3 million to be divided among the states and the District of Columbia.
Moody’s — along with the other two major rating agencies, Standard & Poor’s and Fitch — were widely criticized for giving low-risk ratings to the risky mortgage securities being sold ahead of the crisis, while they reaped lucrative fees. Indiana previously recovered $21.5 million from Standard & Poor’s as part of a nearly $1.4 billion settlement.
In the settlement, the world’s second-largest credit ratings agency acknowledged that it didn’t follow its own standards in rating the risk of securities backed by home mortgages and the collateralized debt obligations that relied on their health.
The system spread the risk of mortgage defaults to banks around the globe and led to a string of financial collapses in 2008 when people began defaulting on risky subprime loans.
That caused the housing market to implode in many areas and sparked the worst U.S. recession since the Depression.
In a statement late Friday, Indiana Secretary of State Curtis Hill said that despite repeated statements emphasizing its independence and objectivity, the states and Department of Justice alleged that Moody's allowed their analysis to be influenced by their desire to earn lucrative fees from their investment bank clients, when they assigned credit ratings to toxic assets packaged and sold by the Wall Street investment banks.
“Investors believed they were getting honest, objective analysis. But in reality, Moody’s entities were misleading the investing public, baiting them with questionable ratings, and doing so at a time when investors were becoming increasingly vulnerable,” Hill said Friday. “Today’s settlement is a product of the hard work that our Consumer Protection Division dedicated to this case.”
Hill credited Deputy Attorneys General Justin Hazlett, Amanda Lee and their team for the roles they played in reaching a resolution in the dispute.
Indiana’s $12.77 million share of the nearly $864 million multi-state settlement will go toward consumer and investor protection and related purposes. Moody’s entities also agreed to significant compliance terms to ensure they conduct their ratings activities independently and objectively – including an annual certification by the CEO of Moody’s Corporation, which will be provided to Indiana every year for the next four years, certifying that Moody’s is following certain compliance requirements.
Under the settlement, Moody’s agreed to a number of reforms designed to make sure its credit ratings are objective, including separating commercial and credit rating functions; ensure changes to its rating methods are independently reviewed, and ensuring that some employees aren’t compensated based on Moody's own financial performance.
Along with Indiana and the District of Columbia, other states involved in the settlement announced Friday are Arizona, California, Connecticut, Delaware, Idaho, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Washington.