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Press Release

Justice Department and State Partners Secure $864 Million Settlement With Moody’s Arising From Conduct In The Lead Up To The Financial Crisis

For Immediate Release
U.S. Attorney's Office, District of New Jersey
Historic Settlement Involves Commitment by Moody’s to Improve Business Practices

NEWARK, N.J. – The U.S. Department of Justice, 21 other states, and the District of Columbia reached a $864 million settlement agreement with Moody’s Investors Service Inc., Moody’s Analytics Inc. and their parent, Moody’s Corporation, the Department announced today. The settlement resolves allegations arising from Moody’s role in providing credit ratings for Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDO), contributing to the worst financial crisis since the Great Depression.


The agreement resolves pending state court lawsuits in Connecticut, Mississippi, and South Carolina, as well as potential claims by the Justice Department, 18 states and the District of Columbia.


The settlement follows an investigation by the U.S. Attorney’s Office for the District of New Jersey and the Justice Department’s Consumer Protection Branch into potential claims pursuant to the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and investigations conducted by various State Attorneys General pursuant to state law.


“Moody’s touted a particularly robust analytical framework for rating RMBS and CDOs,” U.S. Attorney Fishman said. “Moody’s now admits that it deviated from its methodologies and failed to disclose those changes to the public. People making decisions on how to invest their money thought they could rely on the ratings Moody’s assigned to these products. When securities are not rated openly and honestly, individual investors suffer, as does confidence in all parts of the financial sector.”


“Moody’s failed to adhere to its own credit rating standards and fell short on its pledge of transparency in the run-up to the Great Recession,” said Principal Deputy Associate Attorney General Bill Baer.  “Today’s settlement contains not only a significant penalty and factual admissions of its conduct, but also a commitment by Moody’s to new and continued compliance measures designed to ensure the integrity of credit ratings going forward.”

“Our investigation revealed, and Moody’s has now acknowledged, that Moody’s used a more lenient standard than it had itself published,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “Investors relied on Moody’s credit ratings to be objective and independent, and they naturally expected Moody’s to follow its own published methods.”


The multi-faceted settlement includes a Statement of Facts in which Moody’s acknowledges key aspects of its conduct, and a compliance agreement to prevent future violations of law. The Statement of Facts addresses Moody’s representations to investors and the public generally about: (1) its objectivity and independence; (2) its management of conflicts of interest; (3) its compliance with its own stated RMBS and CDO rating methodologies and standards; and (4) the analytic integrity of certain rating methodologies.


The Statement of Facts addresses whether Moody’s credit ratings were compromised by what Moody’s itself acknowledged were the conflicts of interest inherent in the so-called “issuer pay” model, under which Moody’s and other credit rating agencies are selected by the same entity that puts together and markets the rated securities and therefore stands to benefit from higher credit ratings.


Among other things, Moody’s acknowledges in the Statement of Facts:


  • Moody’s published and maintained online its “Code of Professional Conduct” for the stated purpose of promoting the “integrity, objectivity, and transparency of the credit ratings process,” including managing conflicts of interest that it publicly acknowledged arose from the fact that RMBS and CDO issuers determined whether to retain Moody’s to rate these securities.


  • Moody’s acknowledges that it passed these conflicts on to the managing directors of the business units, who were then asked to resolve the “dilemma” between maintaining ratings quality and the need to win business from the issuers that selected them.


  • Moody’s publicly stated that its ratings “primarily address the expected credit loss an investor might incur,” which included its assessment of both the “probability of default” and the “loss given default” of rated securities.


  • Starting in 2001, Moody’s RMBS group began using an internal tool in rating RMBS that did not calculate the loss given default or expected loss for RMBS below Aaa and did not incorporate Moody’s own rating standards. Instead, the tool was designed to “replicate” ratings that had been assigned based on a previous model that calculated expected loss for each tranche and incorporated Moody’s rating level standards. In October 2007, a senior manager in Moody’s Asset Finance Group (AFG) noted the following about Moody’s RMBS ratings derived from the tool: “I think this is the biggest issue TODAY. [A Moody’s AFG Senior Vice President and research manager]’s initial pass shows that our ratings are 4 notches off.”


  • Starting in 2004, Moody’s did not follow its published idealized expected loss standards in rating certain Aaa CDO securities. Instead, Moody’s began using a more lenient standard for rating these Aaa securities but did not issue a publication about this practice to the general market.


  • In 2005, Moody’s authorized the expanded use of this practice to all Aaa CDO securities and, in 2006, formally authorized the use of this practice, or of an even more lenient standard, to all Aaa structured finance securities. Throughout this period, although “[m]any arrangers and issuers were aware” that Moody’s was using a more lenient Aaa standard, Moody’s did not issue publications about these decisions to the general market.


The Statement of Facts further addresses other important aspects of Moody’s rating methodologies, including its “inconsistent use of present value discounts” in assigning CDO ratings and its selection of assumptions about the correlations between assets in CDOs.


Under the terms of the compliance commitments, Moody’s agrees to maintain a host of measures designed to ensure the integrity of its credit ratings. These include:


  • Separation of Moody’s commercial and credit rating functions by excluding analytical personnel from any commercial related discussions and excluding personnel responsible for commercial functions from determining credit ratings or developing rating methodologies;


  • Independent review and approval of changes to rating methodologies by maintaining separate groups to develop and review rating methodologies;


  • Changes to ensure that specified personnel are not compensated on the basis of the company’s financial performance;


  • Enhancing Moody’s oversight functions to monitor the content of press releases and the timeliness of methodology development;


  • Deploying new technological platforms and centralized systems for documentation of rating procedures; and


  • Certifications of compliance by the President/CEO of Moody’s with these commitments for at least five years.


“The Department of Justice is committed to working with companies that are willing to admit what they did and take steps to enhance compliance,” said Deputy Assistant Attorney General Jonathan Olin for the Department’s Consumer Protection Branch. “Non-monetary measures such as those agreed to today are part of the Department’s comprehensive approach to protect the American people by promoting a culture of compliance across industries.”


The settlement includes a $437.5 million civil penalty, which is the second largest payment of this type ever made to the federal government by a ratings agency. The remainder will be distributed among the settlement member states in alignment with terms of the agreement. The states involved in today’s settlement include Arizona, California, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Washington as well as the District of Columbia.


The matter was handled by Consumer Protection Branch Director Michael S. Blume, Senior Litigation Counsel Sondra L. Mills, and Trial Attorney James T. Nelson; and by the U.S. Attorney’s Office District of New Jersey Deputy Chief, Civil Division Leticia Vandehaar and Assistant U.S. Attorneys Thomas G. Strong and Alex S. Weinberg.


For more information about the Consumer Protection Branch and its enforcement efforts, visit its website at For more information about the U.S. Attorney’s Office for the District of New Jersey, visit its website at

Updated January 14, 2017

Press Release Number: 17-008