Ohio AG Sues Rating Agencies

November 20, 2009 (PLANSPONSOR.com) - Ohio Attorney General Richard Cordray has filed a lawsuit against Standard & Poor’s, Moody’s, and Fitch for "providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers."

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 release.

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.