Cuomo: Targets beyond the ratings agencies | FT Alphaville

Cuomo: Targets beyond the ratings agencies

New York’s ever-vigilant attorney general Andrew Cuomo is at it again, this time with an investigation into whether eight banks gave misleading information to rating agencies in order to boost the ratings on particular mortgage securities.

As the New York Times reports:

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

The probe parallels federal inquiries into a wide range of financial companies in the years leading up to the collapse of the housing market. But, as the Times notes, whereas the federal probes have focused on interactions between the banks and their clients who bought mortgage securities, “this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities”.

The New York Times notes that Cuomo’s investigation follows its publication of an article that described the measures employed by some bankers to get more positive evaluations from credit rating agencies.

But it also comes amid comments like these below, from Piper Jaffray analysts, after the SEC’s last Friday move to send a Wells notice to Moody’s, warning it might sue the agency for “false and misleading” statements in its application as a ratings organisation.

That notice, as FT Alphaville reported at the weekend, is linked to the investigation by former Alphaviller Sam Jones into the company’s modelling errors on CPDOs.

Jones’ investigation found that Moody’s had wrongly bestowed triple-A ratings on billions of dollars of so-called constant proportion debt obligations.

Piper Jaffray’s subsequent note suggests, as noted in FT Alphaville’s Monday post, that “the blame game is reaching fever pitch”:

While we believe the rating agencies share culpability for the errors that triggered the financial crises, we also think that banks, regulators, Congress, borrowers and investors all played leading roles. However, following recent Senate hearings, the tone in Washington has become increasingly strident, boosting the probability that regulatory reform could prove more burdensome than initially anticipated, at least near-term.

It might come as welcome relief for the rating agencies, then, to see Cuomo and possibly others turn their sights on the banks. But ultimately, it seems, their woes are really just beginning.

Related links:
European leaders hit at ratings agencies – FT
Moody’s chief admits to failings in run-up to financial crisis – FT
The incredible quantum credit rating – FT Alphaville
Moody’s in hooker heels – FT Alphaville