Already reeling under harsh
criticism for their role in the US residential mortgage-backed
securities fiasco, rating agencies are facing a new attack, this
time for under-rating US municipal bonds. The attack comes in the
form of a law suit initiated by Connecticut attorney general
Richard Blumenthal.

Blumenthal’s lawsuit names rating agencies Moody’s Corporation and
Fitch Incorporated and The McGraw-Hill Companies, parent company of
rating agency Standard & Poor’s.

The 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, Blumenthal
alleges.

“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,” Blumenthal said in a
statement.

“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.”

He continued that studies by the three rating agencies 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,” stressed Blumenthal. “They
have maintained the dual standard to financially benefit bond
insurers, investors and ultimately themselves.

“The credit rating agencies and bond insurers have enjoyed enormous
profits, at the expense of taxpayers, as a result of this deceptive
dual rating system.”