Ohio, On Behalf of Pension Funds, Files Suit Against Rating Agencies

(November 25, 2009) – The Ohio Attorney General, on behalf of numerous home-state pension schemes, has filed suit against national rating agencies over misleading ratings on real estate-backed securities.

The suit—filed by Attorney General Richard Cordray at the behest 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—charges that Standard & Poor’s, Fitch, and Moody’s provided inflated ratings on many mortgage-backed securities (MBSs), the result of a structure that saw fees paid by the very security issuers that were packaging and selling the MBSs.

According to a statement released by the Attorney General’s office, the rating agencies’ misjudgments cost the Ohio funds upward of $457 million when they purchased securities they believed to be safe but were, in fact, set to fail as mortgage delinquencies rose in 2007 and 2008.

According to the release, the rating agencies were 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 evaluating objectively.” Furthermore, the statement asserts, numerous people at these firms knew the ratings were incorrect. “We rate every deal,” the statement quotes a rating agency analyst as saying. “It could be structured by cows and we would rate it.”

Ohio is not the first state to file suit against the much-maligned agencies: Mississippi and California have done so, also on behalf of public pension plans pinned with losses after holding MBSs and other derivatives that were, in hindsight, clearly incorrectly rated.

For an ai5000 column on rating agencies—and how they are central in the blame game being played following 2008—click here .