U.S. Probes Rating Tactics at Moody’s
The Justice Department is investigating the bond rating tactics of Moody’s Investors Service Inc. in what is believed to be the first probe into how a rating agency obtains municipal bond business.
The investigation by the department’s antitrust division is focusing on Moody’s unsolicited ratings and whether the major Wall Street credit agency unfairly pressured bond issuers to hire it.
Shares of Moody’s parent Dun & Bradstreet fell $1.125 to close at $60.75 on the NYSE.
Major bond rating firms such as Moody’s help determine how much municipalities will have to pay in interest when selling bonds, because the bond ratings help set prices in the $1.2-trillion municipal bond market.
The antitrust division is investigating “the possibility of noncompetitive practices in the bond rating services industry,” department spokeswoman Gina Talamona said Wednesday. She would not identify which firms are being targeted.
Although Moody’s executives acknowledged receiving and responding to an inquiry from the antitrust division, a spokesman said the firm never pressures issuers.
“It’s unthinkable,” spokesman George Fasel said. “It would not, could not and did not happen.” Fasel said the federal probe centers around “certain rating practices” that Moody’s uses when it rates asset- and mortgage-backed securities.
Typically, when a local government such as a county wants to sell bonds, it hires one or two rating agencies and pays each firm a fee to rate the issue.
But Moody’s also occasionally issues unsolicited ratings for local governments if the rating agency feels the deal is particularly noteworthy for the market. For example, Moody’s decided to rate $1 billion of debt being sold last year to build a toll road in Orange County because of concerns by worried investors, although transit officials didn’t hire the firm.
“I wasn’t pressured or cajoled,” said Wally Kreutzen, executive vice president of finance and administration with the Transportation Corridor Agencies. He said the agency hasn’t been contacted by the Justice Department. “I got a free investment grade rating,” he added.
Still, unsolicited ratings have raised concerns among some issuers who received negative ratings from Moody’s even though they never asked the agency to assess their debt.
The Jefferson County School District in Colorado, the state’s biggest, is suing Moody’s in federal court, alleging the firm hurt the marketability of the district’s bonds by issuing a negative outlook on a 1993 bond sale after the district refused to hire Moody’s.
Moody’s, founded in 1911 by John Moody, pioneered the credit rating business.
The investigation won’t affect several lawsuits filed in the wake of the Orange County bankruptcy because all bond ratings given to Orange County and most local governments there were solicited, lawyers said.
