California’s Top Prosecutor Pursues Rating Agencies

SAN FRANCISCO (CN) - Attorney General Gerry Brown has subpoenaed Standard & Poor's, Moody's Investor Service and Fitch Ratings agencies to see if they broke the law in "recklessly giving stellar ratings to shaky assets."

The credit raters gave their highest ratings to financial institutions at the peak of the housing boom. In return, they received billions of dollars from Wall Street - almost double the amount they made grading other products.

Due in part to the high ratings, investors bought trillions of dollars in securities backed by subprime mortgages. When the housing bubble burst in 2007, the securities had defaulted and investors were unable to sell them.

S&P, Moody's and Fitch downgraded the credit ratings of $1.9 trillion in residential mortgage backed securities, which appeared to be "a tacit acknowledgement of their failure," Brown's office said.

"This investigation is meant to determine how these agencies could get it so wrong and whether they violated California law in the process," Brown said at a news conference, noting that the firms' ratings "proved toxic to the entire financial system."

Brown ordered the agencies to produce the information by Oct. 19.

Among other things, he seeks to determine whether the credit ratings agencies conspired with the companies they graded.

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