Jerry Brown joins the credit rating firm pile-on


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Is there an easier target today than the credit-rating firms that helped bring us the subprime mortgage catastrophe?

Under siege by Congress, the Securities and Exchange Commission and angry investors, the major rating companies -- Standard & Poor’s, Moody’s Investors Service and Fitch Ratings -- now will have to contend with a probe by California Atty. Gen. Jerry Brown.

‘Standard & Poor’s, Moody’s and Fitch put their seal of approval on high risk mortgage-backed securities, recklessly giving stellar ratings to shaky assets that proved toxic to the entire financial system,’ Brown said in a statement today. ‘This investigation is meant to determine how these agencies could get it so wrong and whether they violated California law in the process.’


Brown, a probable candidate for governor, said he has issued subpoenas to the companies, seeking answers to questions including ‘whether the rating agencies failed to conduct adequate due diligence in the rating process’ and ‘whether the rating agencies gave high ratings to particular securities when they knew or had reason to know that high ratings were not warranted.’

This sounds like the most basic fishing expedition an attorney general could undertake. These are questions other regulators have been asking for the last two years.

As Moody’s said in a statement today regarding Brown’s subpoena: ‘Moody’s has received inquiries from various state and regulatory authorities seeking information about our ratings. We will review this inquiry once it is received and will offer our cooperation as appropriate.’

The rating firms have a lot more to worry about than Jerry Brown. The SEC is expected to vote today on new disclosure rules for the companies and their investor clients.

From Bloomberg News:

The SEC proposals include forcing banks selling securities to disclose whether they shopped for ratings among companies for an assessment that would make it easier to sell debt. Such information would tell investors whether ratings underestimate the risk that bonds will default, the SEC said. Commissioners also plan to vote on whether to require the ratings companies to disclose revenue from their biggest clients and that employees provide written statements that their opinions can be used as part of a securities sale. The change may subject ratings companies to lawsuits if investors can prove ratings were based on false information.


-- Tom Petruno