California's attorney general said Thursday his office is investigating Wall Street's big credit rating agencies to determine what role they may have played in the collapse of the financial markets.
California's attorney general said Thursday his office is investigating Wall Street's big credit rating agencies to determine what role they may have played in the collapse of the financial markets.
Attorney General Jerry Brown said he has issued subpoenas to Moody's Investors Service, Standard & Poor's and Fitch Ratings to determine whether they violated state law in "recklessly giving stellar ratings to shaky assets."
The agencies are crucial financial gatekeepers, and investors depend on their ratings of public companies and securities to gauge risk and make investment decisions.
At the peak of the housing boom, the agencies gave their highest ratings to securities backed by subprime mortgages that later fell apart. The agencies had to downgrade thousands of securities as the value of those investments plummeted, contributing to hundreds of billions of dollars in losses and write-downs at big banks and investment firms.
The rating agencies either ignored or didn't understand the risks, Brown said. He added that the agencies made billions of dollars in revenue from the securities they rated.
Michael Adler, a spokesman for Moody's, said the company will review Brown's inquiry "and we will offer our cooperation as appropriate."
Chris Atkins, a spokesman for Standard & Poor's, said the agency couldn't comment because it hasn't yet seen the subpoena. A representative of Fitch did not immediately return a call for comment.
Brown gave the agencies an Oct. 19 deadline to respond to the subpoenas to determine whether they did due diligence in the rating process and whether they profited from giving inaccurate ratings to particular securities, among other questions.
Brown's announcement came the same day federal regulators proposed new rules designed to stem conflicts of interest and provide more transparency on the credit rating industry. The five members of the Securities and Exchange Commission voted at a public meeting to propose rules that would open the agencies' practices to wider public view and subject them to some restraints.
One SEC proposal discussed Thursday is intended to bar companies from "shopping" for favorable ratings of their securities.
California's probe comes on the heels of similar investigations under way in other states.
In July, the California Public Employees' Retirement System sued Moody's, Fitch and S&P, saying they lured the fund into bad investments. The nation's largest public pension fund blames them for more than $1 billion in investment losses.
