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April 26, 2010
Credit Rating Agency Hit With Subpoena for Failing to Comply With Investigation
    by Robert Kropp

The Financial Crisis Inquiry Commission issues subpoena to Moody’s Investors Service after the credit rating agency failed to respond to its request for documents.

The Financial Crisis Inquiry Commission (FCIC), a bipartisan commission established by the Fraud Enforcement and Recovery Act of 2009, is charged with the responsibility for examining “the causes, domestic and global, of the current financial and economic crisis in the United States.” The Commission held its first meeting in January 2010, and is scheduled to deliver its report to Congress on December 15, 2010.

Last week, the FCIC issued its first
subpoena, to Moody’s Investors Service, for “failing to comply with a request for documents in a timely manner.” According to chairman Phil Angelides, the Commission issued its request to Moody’s on March 10, and gave the credit rating agency two weeks to comply.

Moody’s, along with Standard & Poor's, are the largest of the ten credit rating agencies registered with the Securities and Exchange Commission (SEC) as Nationally Recognized Statistical Rating Organizations (NRSRO) to determine the creditworthiness of financial products. Critics have charged that the rating agencies, which are most often paid for their services by the financial institutions whose products they evaluate, contributed to the severity of the financial crisis by providing inflated ratings for securities consisting of subprime mortgage loans.

The inflated ratings misled investors into believing that the securities consisting of subprime mortgage loans were credit-worthy. Since the financial crisis struck in 2008, almost all the securities have been downgraded to junk status.

Last September, the SEC unanimously approved proposed rule changes that would increase oversight of NRSROs. In March, Connecticut Attorney General Richard Blumenthal filed a lawsuit against Moody’s and Standard & Poor's, charging that their "alleged misconduct enabled the worst economic downturn in the nation since the Great Depression."

In a
statement issued last week, Senator Carl Levin of Michigan, the Chairman of the Senate Permanent Subcommittee on Investigations, said, “Had the credit rating agencies taken more care in handing out their initial ratings, or had they issued downgrades in a more responsible manner, they could have reduced the impact of the toxic mortgages.”

In his statement, Senator Levin quoted from a number of emails obtained from Moody’s, including one from a managing director which read, “Our errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both.” Senator Levin also pointed out that the financial reform bill being deliberated by the US Senate provides for a number of measures to increase credit rating oversight.

Moody’s has reportedly responded to the subpoena by providing the FCIC with the documents it requested. Angelides has said that Standard & Poor's and other rating agencies have complied with the Commission’s requests for information.

In a statement, Michael Adler, a Moody’s spokesman, said that the rating agency “looks forward to the opportunity to provide the committee with our perspective as it seeks to understand the financial crisis and the role of the rating agencies.”


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