New Hampshire to get $7.2 million in Moody’s settlement

In deal, company agrees it manipulated mortgage-backed securities ratings

New Hampshire will be receiving a $7.2 million share of an $863 million agreement with Moody’s Corp. to settle charges that the company manipulated its ratings of toxic assets that helped lead to the 2008 market collapse and caused millions of people to lose their homes in order to pocket lucrative fees.

Moody’s used outdated methodologies to rate packages of residential mortgage-backed securities and collateralized debt obligations that made them seem less risky than they actually were, according to the statement of facts that Moody’s agreed to. The tactic masked the fact that they contained a larger percentage of mortgages that homeowners couldn’t afford to repay, without clearly disclosing this to investors, the statement said.

“The methodologies that were presented to the public weren’t the methodologies they used,” summed up Jeffrey Spill, deputy director of the state Bureau of Securities Regulation.

Under the deal, the U.S. Department of Justice will receive a little over half the settlement ($437.5 million) while 22 states and the District of Columbia, which took part in the action, will get the remaining $426.3 million.

Three states – Connecticut, Mississippi and South Carolina – issued their own cases against Moody’s that were incorporated in the global settlement. But the New Hampshire’s Securities Bureau did more than just tag along.

Spill said it had jurisdiction because some of the investors who bought the securities were in the state and contributed the time of several attorneys and an intern to an investigation that was so large it would not fit on the state’s computer system.

Since most of the states were doing this under consumer protection law, the investigation focused on general manipulation rather than individual securities.

2004 to 2010

New Hampshire’s share – more than four times the agency’s annual $1.6 million budget – amounts to the third-largest securities settlement in the state’s history, the latest and largest being the $20 million settlement in 2010 with UBS over student loan fraud. But it was one of the smallest awards of the participating states.

The money will first be applied to agency expenses, with the bulk going into the state’s general fund.

Moody’s manipulation occurred from 2004 to 2010, though it was most intense between 2004 and 2007, the years leading up to the housing market crash, according to the settlement’s statement of facts.

Moody’s was aware there was a potential of a conflict of interest, because it was being paid by issuers of the very bonds that it was rating. The facts indicated that Moody’s was aware that an outdated rating system did not reflect the real risk involved with subprime and other risky mortgages. However, a more accurate system would cause a rating would mean that Moody’s “may not be able to compete.” It considered updating the system but ended up rejecting it without informing investors. In late 2008, when the house market started to crash, Moody’s switched to a more accurate rating system, again without informing investors of the change.

In addition to the monetary settlement, Moody’s agreed to separate the analytical part of its business from its commercial aspects, such as marketing and fee negotiation. It also agreed to change the way analytical personnel get paid are trained.