California Attorney General Jerry Brown today announced that he has issued subpoenas to the three major ratings agencies as part of an investigation into the way they rated securities, such as those backed by subprime mortgages that later went sour as the housing market bubble burst.

Brown’s assessment of the problem is by now familiar: that Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings were driven by profit motives in assigning triple-A ratings to many complicated securities that proved to be worthless.

But the attorney general said his office’s investigation is focused on the application of California state law prohibiting unfair and deceptive business practices.

“We think this is a very serious matter that has not been adequately investigated by federal authorities,” Brown said this morning at a press conference announcing the subpoenas.

He said the investigation is not looking at the agencies’ ratings of the state government itself.
Brown said the subpoenas direct the agencies to provide, by Oct. 19, information that will help answer the questions of whether they:

— Failed to conduct adequate due diligence in the rating process.
— Gave high ratings to particular securities when they knew or had reason to know that high ratings were not warranted.
— Failed to comply with their own codes of conduct in rating certain securities.
— Profited from giving inaccurate ratings to particular securities.
— Made fraudulent representations concerning the quality or independence of their ratings.
— Compromised their standards and safeguards for profits.

The subpoenas also seek to find out whether the agencies’ statistical models captured the risk inherent in subprime and other risky assets and, if not, how did the agencies’ respond; and whether they conspired with the companies whose products they rated to the detriment of investors.

Brown said he didn’t want to predict a timeline for how long it will take to investigate.

“This is not a case where you snap your finger and get a couple of boxes of documents,” he said.
Financial Security Assurance Holdings in May said Brown had requested information from it related to his investigation of credit rating agencies, the firm said in a first-quarter 2009 filing.

California Treasurer Bill Lockyer’s office last Fall said that it provided information on the practices of credit rating agencies to Brown.

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