California Attorney General Jerry Brown Thursday issued subpoenas to three leading credit rating agencies as part of the initial stage of a probe into their role in the financial crisis.
Brown announced at a news conference in San Francisco that he has subpoenaed Standard & Poor's, Moody's Investors Service and Fitch Ratings.
He said the agencies "gave their seal of approval, the highest rating" to securities backed by high-risk subprime mortgages "that were highly dangerous and in fact, wrecked the lives of millions of people."
The ratings, which investors use to assess the risk of possible investments, were issued during the peak of the housing boom and made the securities appear as safe as government-issued Treasury bonds, according to Brown.
Banks, pension funds and other investors then bought trillions of dollars of the securities, enlarging the housing bubble until homeowners began defaulting on their mortgages in huge numbers and the bubble burst. Those who invested in the securities were left holding the bag.
Brown called it "one of the real dark sagas of American financial history," citing figures of 4.9 million foreclosures nationwide, a nearly 5 percent unemployment rate increase, and a Dow Jones Industrial Average drop of more than 4,000 points since December 2007.
Brown said the credit rating agencies earned billions in revenue and worked behind the scenes with the same Wall Street firms that created the securities.
"We believe that there's been a wrong, and there must be a remedy," Brown said, adding that he was not suing any of the agencies today, only gathering information.
"I'm issuing subpoenas to get to the truth," he said. He's asking the agencies to respond to his office by Oct. 19 and answer a series of questions, including whether they knew their own high ratings were unwarranted, and whether they profited from them.
Brown said the role of credit rating agencies "has not been adequately investigated by the federal authorities."
"We think that these agencies have been coddled, and protected, by federal agencies for too long," Brown said.
Supervising Deputy Attorney General Kathrin Sears, who is heading the attorney general's investigation, said the agencies are being probed for possible violation of state laws on unfair or deceptive business practices and false advertising.
"This is a difficult case," Brown said, "because the rating agencies have become the untouchables of American capitalism."
Sears said the attorneys general of Connecticut and New York have previously opened separate investigations into the role of credit agencies in the mortgage crisis. A lawsuit filed against the agencies by the state of Connecticut is still hung up in court, she said.
The California Public Employees Retirement System, or CalPERS, filed a separate lawsuit last month in San Francisco Superior Court against the three credit rating agencies.
CalPERS, the largest state pension fund in the country, provides retirement, health and other benefits to about 1.6 million state workers, retirees and their families.
The lawsuit alleges "negligent misrepresentation" by the agencies in assigning their highest ratings to securities in which the pension fund invested $1.3 billion in 2006. The suit says CalPERS lost "perhaps more than $1 billion."
Representatives of the three credit-rating firms were not immediately available for comment.