New York probing rating firms: source

The New York attorney general has launched a probe into the mortgage bond rating practices of major ratings firms as a factor in the 2008 financial crisis, a person close to the investigation said Friday.

The New York probe will look at the ratings of mortgage securities by Standard & Poor's, Moody's and Fitch. Those ratings have been criticized for being overly positive and downplaying risk to investors ahead of the 2008 crisis.

New York Attorney General Eric Schneiderman sent a subpoena to S&P and formal information requests to Moody's and Fitch, said the person close to the investigation.

The New York action comes on the heels of a lawsuit filed earlier this week by the Department of Justice against S&P.

The US accused S&P of knowingly inflating its ratings on collateralized debt obligations and residential mortgage-backed securities in 2007 in order to win revenue from issuers. S&P has called the suit meritless and pledges to fight the case.

The US suggested it would seek at least $5 billion from S&P in civil damages.

Any enforcement by New York state could face a hurdle following a June 2008 settlement between the firms and Schneiderman's predecessor, Andrew Cuomo, that cleared the ratings firms of additional enforcement in exchange for abiding by a number of provisions.

The 2008 settlement is not a public document, but Cuomo issued a news release laying out some of the measures agreed by the rating firms. They include reforms on the fee structure charged on investment banks and additional disclosure.

The New York attorney general could proceed with enforcement against the rating firms if the probe shows the firms violated the terms of the 2008 agreement, said the person close to the New York probe.

An S&P spokeswoman declined to comment on the New York probe.

Moody's chief executive Ray McDaniel suggested the New York probe was a routine regulatory matter. He told analysts on a conference call that Moody's responds to regulator queries on an "ongoing basis."

A Fitch spokesman didn't immediately respond to a message.