Connecticut sues top credit rating agencies

By Martha Graybow

NEW YORK (Reuters) - Connecticut's attorney general said on Wednesday he was suing the three leading credit rating agencies, saying they assigned lower ratings than necessary to bonds issued by cities, schools and other public entities, driving up costs for taxpayers.

The case is the latest headache for ratings firms, which have been assailed by critics who have blamed them for helping to fuel the subprime mortgage crisis by giving high ratings to risky securities that later collapsed.

The lawsuits against Moody's Corp, McGraw-Hill Cos Inc's Standard & Poor's ratings unit and Fimalac's Fitch ratings are the first court actions resulting from the state's ongoing probe into raters, bond insurers and other organizations, said Attorney General Richard Blumenthal.

The rating firms, whose independence has also been questioned by lawmakers and politicians, are accused of underrating public bonds compared with corporate debt.

Blumenthal said towns and school districts have been forced to buy bond insurance to improve their ratings 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," he said.

Moody's, Fitch and S&P said the suits were without merit.

The cases, being filed in state Superior Court in Hartford, accuse the rating agencies of violations of Connecticut's unfair trade practices law.

Bond issuers hire ratings agencies to assess their debt.

The lawsuits seek the return of money to municipalities as well as penalties and disgorgement of funds, Blumenthal said.

He said the raters' own studies have shown that states and cities pose little default risk, but the agencies nevertheless give them lower ratings than comparable corporate bonds.

UPHILL BATTLE

The lawsuit against Moody's quotes an August 2006 internal e-mail from a senior credit analyst, which said: "I think there is clearly a mismatch between the default data and people's perception of the risk associated with municipal credits."

The ratings firms said they would fight the lawsuits. Fitch called the litigation "an unfortunate development." It also said it has been working on a review of municipal finance ratings that is expected to be released on Thursday.

S&P parent McGraw-Hill said the lawsuit "is simply a case of a state attempting to use litigation to dictate what bond rating it receives." It said Connecticut's claims violate its First Amendment rights and if successful, the state suit would erode analytical independence.