Officials Hope Suit Against Bond Rating Agencies Changes ‘Unfair Practice’

By John Voket

Two members of Newtown’s Board of Finance and the town’s finance director are hailing a suit being filed by the State of Connecticut against municipal bond rating agencies to force those organizations to rate towns and cities on the same criteria as private companies. Standing among mayors and first selectmen from across the state, Attorney General Richard Blumenthal Wednesday said he is suing the three national credit rating agencies for allegedly giving municipalities artificially low credit ratings, costing taxpayers millions of dollars in unnecessary bond insurance and higher interest rates.

Mr Blumenthal’s lawsuit names Moody’s Corporation, Fitch, Inc, and The McGraw-Hill Companies, parent company of Standard & Poor’s (S&P).

The lawsuit is the first court action in an investigation — ongoing since late fall of 2007 — that is continuing as to possible antitrust violations, consumer protection, and potentially other violations by credit rating agencies, bond insurers, and related entities.

All three credit rating agencies systematically and intentionally gave lower credit ratings to bonds issued by states, municipalities, and other public entities as compared to corporate and other forms of debt with similar or even worse rates of default, Mr Blumenthal alleges.

As a result of these low ratings, Connecticut’s cities, towns, school districts, and sewer and water districts have been forced to spend millions of taxpayer dollars to purchase bond insurance to improve their credit rating, or pay higher interest costs on their lower rated bonds.

“We are holding the credit rating agencies accountable for a secret Wall Street tax on Main Street — millions of dollars illegally exacted from Connecticut taxpayers,” Mr Blumenthal said. “Connecticut’s cities and school districts have been forced to spend millions of dollars, unconscionably and unnecessarily, on bond insurance premiums and higher interest rates as a result of deceptive and deflated credit ratings. Their debt was rated much lower than corporate debt despite their much lower risk of default and higher credit worthiness.”

The attorney general said studies done by all three agencies themselves since 1999 show that public bonds default far less often than corporate bonds with similar, higher credit ratings.

“In fact, public bonds with low ratings have lower default rates than the highest rated corporate bonds. They have maintained the dual standard to financially benefit bond insurers, investors, and ultimately themselves,” he said.

Board of Finance Chairman John Kortze responded saying he was happy to hear the proposed action was coming to fruition.

“I think it will put pressure on them to address, in some form, the issue,” Mr Kortze said. “If [rating criteria] is changed to be comparable to corporate ratings, it will be great for municipalities.”

Fellow finance board member Joseph Kearney echoed some of his chairman’s thoughts.

“It’s hard not to be amazed at the double standard here,” Mr Kearney said. “And while I am not a big fan of certain tactics by states’ attorneys general, I am supportive of Mr Blumenthal on this issue.”

Newtown Finance Director Robert Tait decried the “unfair practice” of rating corporations on a different criteria than municipalities, which virtually never default on bonds.

“Municipalities have been getting it stuck to them on interest rates for some time,” Mr Tait said. “Municipalities are much less risky investments than equally rated corporate bonds.”

Mr Tait said he stands with many municipal finance officials here in Connecticut and across the nation, and was happy to see the action moving forward.

“It’s an unfair practice, and a gripe many municipalities have had for many years,” he said, adding that Mr Blumenthal’s suit “puts the rating agencies’ practices in the forefront.”

Mr Blumenthal’s lawsuit, filed in coordination with Department of Consumer Protection Commissioner Jerry Farrell, Jr, alleges the credit rating agencies violated the Connecticut Unfair Trade Practices Act by intentionally misrepresenting and omitting material facts that caused bond issuers in Connecticut to purchase bonds at higher interest rates.

According to an Associated Press report, Anthony Mirenda, a spokesman for Moody’s, which rates Newtown’s credit worthiness, said that company officials had received the lawsuit and were reviewing it.

“Based on our understanding of the allegations as it relates to Moody’s, it is entirely without merit and we expect it will be dismissed expeditiously,” Mr Mirenda said.