Moody's Corp. will pay $130 million to the California Public Employees' Retirement System to settle allegations that the ratings agency acted negligently by giving top scores to ultimately toxic investments that cost the pension fund hundreds of millions of dollars, CalPERS said Wednesday.
CalPERS sued Moody's and rival ratings agencies Standard & Poor's and Fitch in 2009, saying the agencies gave AAA ratings -- which imply extremely low risk -- to bonds backed by subprime mortgages.
CalPERS, the nation's largest public pension fund, put $1.3 billion into those bonds in 2006, at the height of the subprime-fueled housing boom. When the bonds went bad in the ensuing crash, the fund estimates it lost as much as $1 billion, according to court filings.
In those filings, CalPERS said the ratings agencies' opinions of the bonds "proved to be wildly inaccurate and unreasonably high," and that the methods the agencies used to rate the bonds "were seriously flawed in conception and incompetently applied."
With today's settlement, plus a $125-million deal reached with S&P last year, CalPERS' total settlements related to the $1.3-billion bonds investment stand at $255 million.
"This resolves our lawsuit against Moody's and restores money that belongs to our members and employers," said Matthew Jacobs, CalPERS' general counsel. "We are eager to put this money back to work to help ensure the long-term sustainability of the fund. "
In an emailed statement, Moody's spokesman Michael Adler said: "The resolution of this long-running litigation ... is in the best interest of our company and its shareholders.”
The ratings agencies played a key role in fueling the subprime mortgage market, putting solid credit ratings on bonds and complex investment products backed by risky loans.
The Securities and Exchange Commission found in a 2008 report that the agencies had no set procedures for rating mortgage-backed bonds and other now-toxic assets, and that the firms didn't disclose conflicts of interest.
Chief among the complaints against the agencies was that they were paid for their ratings by the banks and other lenders issuing mortgage-backed bonds.
"This conflict of interest led to the ratings agencies giving high credit rankings to increasingly riskier deals," CalpERS said in its suit against the agencies.
The Moody's settlement comes just over a year after S&P, a division of data provider McGraw Hill Financial, agreed to pay $1.4 billion to the U.S. Department of Justice and 19 states, including California, to settle similar allegations.
California received $210 million, most of which was set to go to CalPERS and the state's other massive pension fund, the California State Teachers' Retirement System, to offset crisis-era investment losses.
S&P's $125-million settlement over CalPERS' $1.3-billion bonds investment was handled separately.