A news release from Cordray’s office said the lawsuit alleges the rating agencies gave many of these investments the highest investment-grade credit rating of “AAA” which assured institutional investors that the investments were extremely safe with a very low risk of default. According to preliminary estimates, the improper ratings cost the Ohio funds losses in excess of $457 million, according to the statement.
The lawsuit is on behalf of the Ohio Public Employees
Retirement System, the State Teachers Retirement System of Ohio, the Ohio
Police & Fire Pension Fund, the School Employees Retirement System of Ohio,
and the Ohio Public Employees Deferred Compensation Program.
Cordray accuses the rating agencies of making “spectacularly
misleading evaluations of mortgage-backed securities due in part to the
lucrative fees they received from the same issuers they were supposed to be
objectively evaluating.” The news release said public statements and
testimony indicate that rating agency executives and analysts knew their
ratings of mortgage-backed securities were wrong.
One rating agency analyst admitted that the market for mortgage-backed
securities was “little more than a house of cards” with a much higher
risk of devaluation than indicated by the purported investment-grade “AAA”
rating. Another rating agency analyst said “we rate every deal. It could
be structured by cows and we would rate it,” according to the news
The agencies are also facing lawsuits on behalf of public pension funds of California and Mississippi (see Credit Rating Agencies Face Second Lawsuit by Public Pension Fund ).
Ohio’s lawsuit is available here.