- The Washington Times - Thursday, July 31, 2008

NEW YORK | Connecticut Attorney General Richard Blumenthal sued Moody’s Corp., Fitch Inc. and the parent of Standard & Poor’s, claiming they unfairly gave municipal bonds lower ratings than comparable corporate or structured debt.

“We are holding the credit-rating agencies accountable for a secret Wall Street tax on Main Street,” Mr. Blumenthal said. The complaints, filed Wednesday in Connecticut Superior Court in Hartford, seek redress for what Mr. Blumenthal called the companies’ “deceptive and illegal” business practices.

Mr. Blumenthal, the state’s top law-enforcement officer, has been conducting an antitrust probe of the three companies since last summer. In June, he said firms that rate U.S. municipal bonds “knowingly and systematically” gave the securities lower grades, raising costs for state and local governments.

The McGraw Hill Cos., the parent of New York-based S&P;, said Connecticut was attempting to “use litigation to dictate what bond rating it receives,” and Fitch Managing Director David Weinfurter and Moody’s Chief Executive Officer Raymond McDaniel said the suit had no merit.

“The suit implies that the measuring system is wrong,” Mr. McDaniel said Wednesday during a conference call with analysts. “That’s like saying it’s wrong to measure distance in centimeters and right to measure it in inches.”

Borrowers in the $2.66 trillion U.S. municipal market have for decades paid insurers to guarantee their bonds, seeking to lower borrowing costs by paying AAA-rated companies to stand behind the securities. That practice has drawn fire this year from public officials who said it exaggerates the risk that municipal bonds will default, forcing states, cities and schools to buy backing they don’t need.

Hundreds of state and local governments were stung by higher borrowing costs this year after bond insurers, including MBIA Inc. and Ambac Financial Group Inc., were stripped of their top credit ratings because of losses on securities linked to U.S. home loans. Officials including California State Treasurer Bill Lockyer have said that insurance wouldn’t be necessary if state and local bonds were assessed using the same criteria as corporate debt.

New York-based Moody’s said last month it would change the way it rates municipal bonds and rank them on the same scale it uses for corporate and sovereign debt. Fitch, a unit of Paris-based Fimalac, performed “a comprehensive review” of its municipal finance ratings and will disclose the results Thursday, Fitch’s Mr. Weinfurter said.

“Fitch rates Connecticut and all states based on our forward- looking opinion as to their financial capacity to pay their debts as they come due - not based solely on historical rates of default,” he said, adding that the firm would fight the suit.

Mr. Blumenthal said bond insurers profited from unnecessary premiums and interest paid by taxpayers.

“This rating charade created a Wall Street shell game constructed by the ratings agencies for the benefit of the bond insurers,” he said.

On June 20, U.S. House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, introduced legislation in an effort to make the credit-rating agencies end the separate rating scales.



Click to Read More

Click to Hide