Connecticut Attorney General's Office
Press Release
Attorney General Says Credit Rating Overhaul Will Save Towns And Citizens Millions On Interest Payments
April 5, 2010
Attorney General Richard Blumenthal today said Fitch Ratings -- as a result of his pending 2008 lawsuit against the credit rating agencies -- will overhaul and upgrade its credit ratings on nearly every state and city beginning today, saving Connecticut municipalities millions of dollars in interest payments over time.
“Facing our legal action, the credit rating agencies are beginning to repeal their secret Wall Street tax on Main Street -- just as we demanded they do,” Blumenthal said. “This news is critical as nearly every city and town in Connecticut faces devastating budget choices, including teacher layoffs and cutting essential services.
“This widespread ratings upgrade will save Connecticut cities and towns millions in completely unnecessary interest payments in the future -- and should have happened long ago -- but we are continuing this fight for money back.
“I will continue pursuing legal action to force the rating agencies to disgorge the millions of dollars in fees they earned on artificially deflated and unjustified ratings. And S&P still has failed to follow Moody’s and Fitch in revising their ratings standards.”
Fitch’s announcement, following a similar plan announced in March by Moody’s Investors Service, is part of what Blumenthal sought in his July 2008 lawsuit against all three credit rating agencies -- that municipalities’ credit should be judged by the same standards as corporate issuers. The Moody’s plan will be implemented over the next few weeks.
Blumenthal’s 2008 lawsuit alleged that all three credit 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.
As a result of these deceptive and unfairly low ratings, Connecticut’s cities, towns, school districts, and sewer and water districts have been forced to spend millions of taxpayer dollars to purchase bond insurance to improve their credit rating, or pay higher interest costs on their lower rated bonds.
“These unnecessary costs are paid directly by every Connecticut taxpayer,” Blumenthal said. “Fitch and Moody’s are preparing to overhaul their credit rating system -- just as we demanded they do -- so that taxpayers will no longer face a tougher standard than corporations.
“For decades the credit rating agencies used a two-tiered ratings system -- treating states and municipalities harsher than corporations. This unequal treatment wrongly forced Connecticut’s cities and school districts to spend millions of dollars on unnecessary bond insurance premiums and higher interest rates due to artificially deflated credit ratings. Towns and cities, despite having virtually no chance of defaulting, received debt ratings much lower than riskier corporate debt.”
By law in Connecticut, a town cannot default on a bond without express written permission from the governor, Blumenthal said.
Blumenthal’s lawsuit against Moody’s, Fitch and The McGraw-Hill Companies (parent company of Standard & Poor’s) is pending in the Second Circuit Court of Appeals. The lawsuit alleges that 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.
Both Moody’s and Fitch plan to overhaul their rating systems to level the playing field between public and private issuers. S&P has not announced a similar plan.
In a separate pending lawsuit filed last month against Moody’s and S&P, Blumenthal alleges that Moody’s and S&P knowingly assigned tainted credit ratings to risky investments backed by sub-prime loans. Blumenthal alleges that these practices enabled the worst economic downturn in the nation since The Great Depression.