UPDATE 3-California asks court to enforce Moody's subpoena

* Standoff grew out of investigation launched in September

* Moody’s says some documents turned over already (Recasts; adds quotes)

LOS ANGELES, April 19 (Reuters) - California’s attorney general on Monday accused Moody’s Investors Service of stonewalling his probe into why it gave its highest credit ratings to risky mortgage-backed securities that helped ignite the U.S. credit crisis.

Attorney General Jerry Brown said his office took the “virtually unprecedented” step last Friday of filing a petition seeking a court order to enforce a subpoena his office issued last September demanding information about how Moody’s sets its credit ratings.

Brown, running as the presumed Democratic nominee in this year’s race for governor, said a key question raised by the subprime mortgage debacle is whether Moody’s gave investment banks overly favorable ratings at the expense of investors.”

“In California alone, half a million people are losing their homes,” Brown said at a news conference on Monday. “And all this came out of mortgage manipulation, fraud, behavior that is completely unethical and in many cases illegal. ... Ultimately, the people who destroyed so much wealth in America will account.”

“If Moody’s has nothing to hide, why are they hiding?” he added.

Moody's MCO.N has asserted in court that state officials lack authority to demand information pertaining to a matter subject to federal regulation under the U.S. Credit Rating Agency Reform Act.

But a spokesman for Moody’s, the biggest of Wall Street’s major credit agencies, said the company already has provided Brown’s office with “tens of thousands of pages in response to his request and we’re going to provide additional materials.”

“We will continue the ongoing dialogue we’ve had with the attorney general to resolve the concerns he raised today,” said the spokesman, Michael Adler.


Brown said Moody’s and other ratings services were the “linchpin” in the chain of brokers, lenders, mortgage bankers and other Wall Street market institutions that fueled a housing boom that led to the subsequent collapse of real estate prices in 2007 and wider financial meltdown.

At the peak of the boom, credit agencies gave their highest ratings to complex, highly leveraged financial instruments, including securities backed by subprime mortgages, making them look as safe as government-issued Treasury bonds, Brown said.

Purchases of those securities helped inflate the housing bubble by providing funds for lenders to issue ever-riskier mortgages. When those loans defaulted in record numbers, investors were left holding worthless securities.

The collapse precipitated a wider credit crisis that led to billions of dollars in government bailouts and helped trigger the worst economic slump since the Great Depression.

The subpoena was issued to Moody’s on Sept. 17 when Brown launched an investigation of the roles played by all three major ratings services in the run-up to the housing collapse.

In a court response filed in January, Moody’s refused to answer the 60-plus requests for information and documents in the subpoena on grounds that they pertain to matters “subject to the exclusive jurisdiction” of U.S. federal regulators.

Brown has said that his inquiry focuses on whether Moody’s violated state consumer protection and unfair business practice laws that give his office broad authority to bring suit in cases of false advertising and unfair competition.

Deputy Attorney General Daniel Olivas said Brown's office was pursuing subpoenas on "separate tracks" against Standard & Poor's, owned by McGraw-Hill Companies Inc MHP.N, and Fitch Ratings, a unit of France's Fimalac SA LBCP.PA. He declined to discuss where those inquiries stood.

Connecticut’s attorney general, Richard Blumenthal, filed suit last month against Moody’s and S&P for the ratings they assigned risky bonds backed by subprime loans. (Additional reporting by Joan Gralla and Ciara Linnane in New York and Jim Christie in San Francisco; Editing by Leslie Adler)