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May 24, 2017

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Moody's, S&P, Morgan Stanley settle 'subprime' mortgage investment suits

NEW YORK--Credit ratings agencies Moody's, Standard & Poor's, and investment bank Morgan Stanley have reached agreements to settle two lawsuits on accusations that they hid the risk of "subprime" mortgage investments to customers.

The lawsuits, one from King County in northwestern U.S. state of Washington, the other from Abu Dhabi Commercial Bank, and which date back to before the 2008 economic meltdown, were dismissed by a Manhattan federal court, according to a court filing late Friday.

The plaintiffs claimed that the defendants failed to properly disclose the risk of their investment in a fund that bought bonds backed by subprime mortgages.

The McGraw-Hill Companies, the parent company of Standard and Poor's, told AFP that it ended the two disputes without admitting guilt or responsibility, and that the terms of the agreement were confidential.

Spokespeople for Morgan Stanley and Moody's were not immediately available for comment.

The trial was especially crucial for S&P: on Feb. 5 the U.S. Justice Department filed a lawsuit seeking at least US$5 billion in civil penalties for losses due to inflated ratings of mortgage bonds.

The suit claims that S&P knowingly exaggerated the ratings on financial securities, misrepresenting their true credit risk.

The suit cited S&P's top-grade ratings of dozens of mortgage-based collateralized debt obligations (CDOs) issued in early 2007 that were in default within one year, some within six months.

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