Connecticut Sues Rating Agencies Over Muni Ratings

The lawsuit filed by the Connecticut state attorney general against rating agencies Moody’s, Standard & Poor’s and Fitch over their unduly tough marks for state and municipalities (their policies have claimed the ratings are uniform) is peculiar indeed. While I am sympathetic with the wronged public issuers, the fact is that the rating agencies enjoy a repeatedly upheld First Amendment exemption from liability (they have asserted, successfully, that their ratings are mere journalistic opinion, a claim that is clearly utter rubbish but that the courts nevertheless take seriously.

However, the AG is pursuing an antitrust claim. That may be a novel theory, but will it succeed? Unless the AG can surmount the First Amendment argument, this lawsuit will merely serve as harassment.

From Bloomberg:

Connecticut Attorney General Richard Blumenthal sued Moody’s Corp., Fitch Inc. and Standard & Poor’s parent The McGraw Hill Cos. for allegedly giving municipal bonds lower ratings than comparable corporate or structured debt…

Blumenthal, the state’s top law enforcement officer, has been conducting an antitrust probe of the three credit-rating companies. Last month, he said firms that rate U.S. municipal bonds “knowingly and systematically” gave the securities lower grades, raising costs for state and local governments….Blumenthal said the dual standard benefited bond insurers, investors and the agencies themselves.

“This rating charade created a Wall Street shell game constructed by the ratings agencies for the benefit of the bond insurers,” he said, adding that bond insurers profited from unnecessary premiums and interest paid by taxpayers…..

State officials and regulators have criticized New York- based Moody’s, New York-based Standard and Poor’s and Fitch, a unit of Paris-based Fimalac, for using a scale that raised borrowing costs by holding municipal bonds, whose 10-year default rate was 0.1 percent between 1970 and 2006, to a higher standard than corporate and sovereign debt.

Many issuers bought bond insurance to improve their rating, a strategy that backfired this year when some guarantors lost their AAA ratings amid subprime mortgage-related losses.

The Connecticut probe has included whether the firms rank debt against issuers’ wishes, then demand payment, or threaten to downgrade debt unless they’re awarded business to rate all of an issuer’s securities, Blumenthal has said.

He has also been scrutinizing links between Moody’s and its largest shareholder, Warren Buffett’s Berkshire Hathaway Inc.

Print Friendly, PDF & Email


  1. Gloomy

    This is kind of like getting Capone for tax evasion. As long as the crooks get nailed somehow, I don’t really care what the charge is. The ratings agencies need to pay for their role in destroying our country.

  2. Peripheral Visionary

    I’m with the courts on the protections for the ratings agencies. If they were wide open to lawsuits you’d have every CEO of every two-bit failing firm that’s just been downgraded filing suit hoping for fast cash. This country already has far too many lawsuits, what’s needed is less litigation and more regulation.

  3. Danny

    This is almost comical if it weren’t so sad. They are going to sue a government sponsored monopoly ring under anti trust laws. I can’t wait to see how this plays out.

  4. cusip

    Abolish the Nationally Recognized Statistical Rating
    Organizations (NRSRO) immediately!

    That would be a step in the right direction.

  5. Fledermaus

    this is more than a harassment suit. It sound like they may have a very good argument, given the fact that they gave low ratings to these bonds which have a very low default while at the same time assigning AAA ratings to a bunch of bullshit no doc mortgages.

  6. Anonymous

    Wait until the states start pursuing antitrust claims against Fannie and Freddie. :-)

  7. Anonymous

    We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, the pursuit of Happiness, and the accumulation of nearly unlimited cheap debt.

Comments are closed.