Connecticut Attorney General Richard Blumenthal has filed a lawsuit against Fitch Inc., Moody’s Corp., and McGraw-Hill Companies. He is charging them with deliberately giving lower credit ratings to bonds issued by public entities, such as municipalities, in comparison to corporate and other kinds of debt.
Blumenthal says that by purposely giving artificially low credit ratings to municipalities, taxpayers have been forced to unnecessarily incur millions of dollars in higher interest rates and bond insurance. The lawsuit is part of a probe into bond insurers, credit rating agencies, and related entities and their potential violations, including those involving consumer protection and antitrust.
The Connecticut AG says that the state is holding the defendants responsible for “millions of dollars that have been illegally exacted from the state’s taxpayers.” The lawsuit, filed in coordination with Department of Consumer Protection (DCP) Commissioner Jerry Farrell, Jr., accuses the agencies of violating the Connecticut Unfair Trade Practices when they purposely left out or misrepresented material facts that lead bond issuers to buy bonds at higher interest rate.
Moody’s, Fitch, and McGraw Hill say they will combat the charges against them. McGraw-Hill, Standard & Poor’s parent company, claims that the state of Connecticut is using the lawsuit to dictate the kind of bond rate it gets. Moody says it will push to get the case dismissed.
The way that credit rating agencies deal with municipal bonds was addressed earlier this year in a letter sent to executives at Standard and Poor’s, Fitch, and Moody’s. Sent by the state treasurers of 11 US states, including Connecticut and California, and a number of municipal officials, the letter called on the firms to change their municipal bond rating system so it better reflects the bonds’ default risks. The treasurers say this would save municipalities billions of dollars in interest costs.