Credit rating agencies accused of illegally costing towns millions

Atty. General Richard Blumenthal - joined by mayors and first selectmen from across the state - is suing the three national credit rating agencies for allegedly giving municipalities artificially low credit ratings, and therefore costing taxpayers millions of dollars in unnecessary bond insurance and higher interest rates.

The lawsuit names Moody’s Corporation, Fitch, Inc. and The McGraw-Hill Companies (parent company of Standard & Poor’s/S&P).

The lawsuit is the first court action in an investigation into possible antitrust violations by credit rating agencies, bond insurers and related entities.

The suit claims that all three credit rating agencies systematically and intentionally gave lower credit ratings to bonds issued by states, municipalities and other public entities as compared to corporations and others with similar or even worse rates of default.

As a result, Blumenthal says, Connecticut’s cities, towns, school districts, and sewer and water districts have been forced to spend millions of taxpayer dollars to purchase bond insurance to improve their credit rating, or pay higher interest costs on their lower rated bonds.

“We are holding the credit rating agencies accountable for a secret Wall Street tax on Main Street,” Blumenthal said.

He added, “We demand that the dual standard, anti-taxpayer system be stopped and that the rating agencies pay money back to municipalities, as well as penalties and disgorgement of funds. Most important, we seek to end Wall Street’s unconscionable, costly, secret tax on towns and cities.”

Agencies’ own studies as proof

Blumenthal’s lawsuit, filed in coordination with Department of Consumer Protection (DCP) Commissioner Jerry Farrell, Jr., alleges the credit rating agencies violated the Connecticut Unfair Trade Practices Act by intentionally misrepresenting and omitting material facts that caused bond issuers in Connecticut to purchase bonds at higher interest rates.

“Studies done by all three agencies, themselves, since 1999 show that public bonds default far less often than corporate bonds… In fact, public bonds with low ratings have lower default rates than the highest-rated corporate bonds. They have maintained the dual standard to financially benefit bond insurers, investors and ultimately, themselves,” Blumenthal said.

Blumenthal also alleges that this illegal practice was promoted by the coordinated efforts of the bond insurers.

According to Blumenthal, when in 2006 Moody’s considered rating public debt on the same scale as corporate debt, an Ambac [bond insuring] executive issued a memo that states, “…we know that hardly anybody reads the Moody’s special reports, so it didn’t matter. However, if they actually assign the higher ratings [to the public debt], that’s a totally different story…”

And after the bond insurers met with Moody’s most senior executives, they reported back that: “Mtg. went well…we were preaching to the choir.”

Moody’s dropped any plans to change from its dual-rating system, Blumenthal said.

Posted July 8, 2009