WSJ: Justice Department To Probe Moody's Over Rosy Credit Ratings

(RTTNews) - Credit ratings agency Moody's Corp. (MCO) is being investigated by the U.S. Justice Department for allegedly issuing favorable ratings on mortgage deal in the buildup to the 2008 financial crisis, according to a report in the Wall Street Journal on Sunday.

However, it is not clear whether the DoJ will go ahead and file a lawsuit as the probe is still in the early stages.

The DoJ is said to have been talking with several executives of Moody's Investors Service on the issuance of faulty ratings by compromising standards to boost business wins. The investigations are reportedly focused on residential-mortgage deals between 2004 to 2007.

The move from the DoJ comes after nearly reaching a $1.37 billion settlement with rival ratings agency Standard & Poor's Ratings Services, a unit of McGraw Hill Financial Inc. (MHFI), which is expected to be formally announced as early as next week. The lawsuit against S&P was filed in February 2013.

The two ratings agencies are alleged to have issued triple-A ratings to mortgage deals that made it possible for even conservative investors to buy securities backed by subprime loans that later turned out to be risky. Moody's is said to have been the major issuer of triple-A ratings on residential mortgage-backed securities before the financial crisis.

The investors went on to take a hit of billions of dollars on the securities when the housing market collapsed.

The two ratings agencies together control nearly 80 percent of the credit ratings industry. Including Fitch Ratings, the three would dominate about 95 percent of the credit ratings market.

The DoJ has already secured settlements worth tens of billions of dollars during the past two years from mortgage lenders and banks it blamed for the 2008 financial crisis. Those companies generated unprecedented amounts of shoddy mortgages that were packaged and sold to investors as securities, many of which turned out to be worthless despite their investment-grade ratings.

According to the reports, S&P, the only credit rater sued by the DoJ's residential mortgage-backed securities working group, has alleged it was singled out because of its downgrade of U.S. debt in 2011, while its competitors, which issued the same grades for the same securities, weren't sued by the U.S.

MCO closed Friday's regular trading session at $91.33, down $1.02 or 1.10% on a volume of 1.25 million shares.