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Regulator declines to file suit but cautions credit-rating agencies


BY ZACHARY A. GOLDFARB Moody’s, one of three major


credit-rating firms that mis- judged many of the securities at the center of the financial crisis, escaped legal action Tuesday when federal regulators said they would not sue the company for fraud despite finding evidence that the firm misled investors. The Securities and Exchange Commission said Moody’s execu- tives discovered they had issued overly optimistic ratings but de- cided not to correct them out of concern that “downgrades could negatively affectMoody’s reputa- tion.” The SEC said it chose not to file


suit because of “jurisdictional” limitations. The activities at the center of the SEC investigation took place in Europe, beyond the agency’s reach at the time. But the agency said it might


have made a different decision under the terms of the legislation enacted this summer to overhaul financial regulations. The bill gave the SEC the power to sue credit-rating firms engaged in “otherwise extraterritorial fraud- ulent misconduct.” “Moody’s is pleased that this


matter has been resolvedandthat commission determined the in- vestigation should be closed without pursuing any enforce- ment action,” Michael Adler, a Moody’s spokesman, said Tues-


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day. TheSECseldom issues a report


when it concludes an investiga- tion without taking action. But agency officials said they wanted to send a message in reviewing their findings in the Moody’s probe that credit-rating firms would face increased scrutiny. The SEC’s release of the report


was one of the most significant steps regulators have taken to shed light on the conduct of credit-rating firms in the years leading up to the financial crisis. The big three firms—Moody’s, Standard & Poors and Fitch Rat- ings—have faced far less regula- tory and legal action than banks and other financial firms impli- cated in the meltdown. Federal regulators haven’t sued any of the credit-rating firms. And the new financial regulatory law does not require an overhaul of the indus- try. In the years leading up to the


crisis, these firms issued letter grades to the complex securities that later contributed to the melt- down. In many cases the firms gave high grades to securities that turned out to be excessively risky, such as subprime mortgage- backed securities that received the highest AAA rating. Congressional investigators


have revealed that some employ- ees of the credit rating firmsknew they were giving high grades to overly risky securities. Regulators also have warned that the firms may have been more interested in generating fees from banking cli- ents who paid for securities to be rated, than in offering an unbi- ased assessment.


GOLD$1,249.00 UP$11.00,0.9%


V At the same time, though, the


credit rating firms have enjoyed a privileged status with federal agencies. Regulators often make use of credit ratings to assess the financial health of banks and other financial firms and put limits on what they can do. Credit rating agencies, for their


part, say they have revampedhow they operate. They also say that they are simply issuing opinions on the quality of securities and that investors should not rely solely on their judgements. In summer 2006, Moody’s de-


veloped a method for assessing the risk of a new type of security that allowed investors to bet on corporate bonds. Moody’s gave these securities its highest rating, and they were sold throughout Europe. But several months later, a


Moody’s analyst found a mistake in the computer model that Moody’s used to grade the securi- ty, according to the SEC. The mistake made the security seem less risky than it was. Moody’s executives subse-


quently held meetings to discuss whether to disclose that the rat- ings had been in error. They decided not to make such an announcement, according to the SEC.


One Moody’s executive wrote


in an e-mail: “In this particular caseweseemto faceanimportant reputation risk issue. To be fully honest this latter issue is so im- portant that I would feel inclined at this stage to minimize ratings impact . . .than even allow for the possibility of a hint that the mod- el has a bug.”


CRUDEOIL$71.92 DOWN$2.78,3.7%


SEC won’t pursue Moody’s fraud case After the passage of a 2006 law


that required that credit rating firms register with the SEC, Moody’s filed paperwork stating that it would only take into ac- count the credit quality of securi- ties when issuing ratings and not consider the effect of a rating on Moody’s itself. In its investigative report, the


SEC said that Moody’s did the opposite of what the company pledged it would do. The SEC said thatMoody’s did


not change its approach until it was revealed publicly in a report by the Financial Times in May 2008. “Investors rely upon state-


ments that [credit rating firms] make in their applications and reports submitted to theCommis- sion, particularly those that de- scribe how the [firm] determines credit ratings,” SEC enforcement directorRobertKhuzamisaid in a statement. “It is crucial that [credit rating firms] take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.” Adler, theMoody’s spokesman,


said his firm agrees. “Moody’s fully supports the commission’s message that every rating decision must be based only on credit considerations,” he said, “and Moody’s is committed to maintaining robust proce- dures to ensure that our internal company policies are followed.” goldfarbz@washpost.com


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WEDNESDAY, SEPTEMBER 1, 2010


10-YEARTREASURY UP$5.60PER$1,000,2.47%YIELD


DIGEST TELECOMMUNICATIONS


Verizon ends bid for price-control exemption Verizon Communications has dropped a four-year campaign to


escape price controls in selling competitors access to its residential phone lines in New York, Boston and four other markets, U.S. regulators said. The Federal Communications Commission, in response to Veri-


zon’s Aug. 23 decision, ended a review of procedures for freeing telephone companies from rate regulation, the agency said Tuesday. Qwest Communications International withdrew a similar request covering fourmarkets on Aug. 20, the FCC said. The FCC concluded in 2007 that Verizon didn’t prove that


competition warranted exemptions from price controls in New York; Boston; Philadelphia; Pittsburgh; Providence, R.I.; and Virginia Beach. Sprint Nextel and Herndon-based XO Holdings said exemp- tions would let Verizon avoid laws that promote competition. A federal court last year ruled the FCC was incorrect in its Verizon


decision, but let the agency’s ruling stand as the FCC provided a better explanation for its action.


— Bloomberg News ADVERTISING


CURRENCIES $1=84.04YEN; EURO=$1.268


MORRY GASH/ASSOCIATED PRESS Harley-Davidson has cut back on marketing amid slumping sales.


Harley dropped by a longtime ad agency Harley-Davidson’smain ad agency formore than three decades has


dropped the strugglingmotorcyclemaker in favor of new business. Ad agency Carmichael Lynch, a unit of Interpublic Group, said


Federal spending rises a record 16% boost domestic outlays


BY MICHAEL A. FLETCHER AND CAROLMORELLO


Federal domestic spending in-


creased a record 16 percent, to $3.2 trillion, in 2009, the Census Bureau reported Tuesday, largely because of a boost in aid to the unemployed and the huge eco- nomic stimulus package enacted to rescue the sinking economy. The rise in spending was the


largest since the Census Bureau began compiling the data in 1983. The Washington region was among thebiggestbeneficiariesof the government’s spending. With congressional elections


looming this fall, the spike in fed- eral spending has emerged as one of the nation’s most contentious political issues. ManyRepublicans accuse Pres-


ident Obama and his Democratic allies of being reckless spenders who are harming the nation’s long-term economic prospects by inflating thedeficit. “The stimulus put the nation a


trillion dollars further into debt, which was bad enough, but an additional concern is that there will be efforts to extend andmake permanent many of the stimulus programs,” saidChrisEdwards,an economist at the Cato Institute, a right-leaning think tank. Obama and many Democrats


argue that the spending rescued an imploding economy while re- positioning it for the future by dramatically expanding funding for education, green energy tech- nology andjob training. They also say that much of the


increase infederal outlayswent to struggling families through emer- gency health-care assistance, ex- tended unemployment benefits andfoodstampenhancements. “This is not anything that


should be viewed as a problem,” said Paul Van de Water, a senior fellowat theCenteronBudgetand PolicyPriorities. “It isagoodthing thatwehavetheseprogramswhen people are inneed.” Overall, the largest chunk of


federal spending — about 46 per- cent of the $3.2 trillion—went to Medicare,MedicaidandSocialSe- curity, entitlement programs that are projected to swell as the popu- lationages. Pay for federal employees ac-


counted for nearly $300 billion of the spending and nearly half of thatwent to thedefensepayroll.


Boon toD.C. area The spendingwas a boon to the


Washington area, the seat of gov- ernment and home tomany of its contractors.


JUSTIN SULLIVAN/GETTY IMAGES


Federal stimulus money helped fund construction projects such as the Caldecott Tunnel in Orinda, Calif.


Beneficiaries of federal spending


In fiscal 2009, federal domestic spending rose 16 percent, to $3.2 trillion, the largest percentage increase since the Census Bureau began compiling the data in 1983. Te total equals more than $10,000 per person living in the United States.


States with the highest and lowest per capita spending: HIGHEST


PER CAPITA SPENDING


1. Alaska 2. Virginia 3. Hawaii 4. Maryland 5. New Mexico


LOWEST


46. Oregon 47. Minnesota 48. Georgia 49. Utah 50. Nevada


8,781 8,676 8,538 7,435 7,148


NOTE: Resident populations as of July 1, 2009. SOURCE: U.S. Census Bureau, Consolidated Federal Funds Report for Fiscal Year 2009


THE WASHINGTON POST Among the states, per capita


spending averaged more than $10,000. But Virginia got almost $20,000 per resident, second only to Alaska. Maryland was the fourth highest at more than $16,000 for each resident, behind Hawaii. The District was in a class by


itself.TheCensusBureaucalculat- edtheper capitaspendingatmore than $83,000. But that figurewas greatly skewed by the concentra- tionof federal agencies inthe city. Virginiawaspushedtothefore-


front of federal spending by the high number of defense contrac- torsandservicemembers livingin the state. It saw $67 billion in military spending, a large chunk of the $155 billion the federal gov- ernment spent in the state in 2009. Only California, New York and Florida gotmoremoney over-


all. Much of the federal money


went to private contractors. In Fairfax County, for instance, al- most $40 billion of the $46 billion the federal government spent in the countywent to contractors. In Maryland, federal spending


in fiscal 2009 rose 15 percent, to $92 billion. Maryland’s ranking reflects a large number of resi- dents who are federal employees. MontgomeryCounty, for example, got $28 billion in federal funds, including $4.6 billion in salaries, almost $3 billion in retirement checks and$17.5 billioningovern-


3,825,657 5,266,214 9,829,211 2,784,572 2,643,085


$20,351 19,734 19,001 16,169 13,670


POPULATION 698,473


7,882,590 1,295,178 5,699,478 2,009,671


Stimulus package, spike in jobless aid


ment contracts for vendors.


Effects of budget cuts Like many other jurisdictions


around the country, state work- forces in Maryland, Virginia and the District are all showing the effects of budget cuts. According to the Census Bu-


reau,Virginia,with about 125,000 full- and part-time employees in 2009, added part-time workers last year but they worked fewer hours. Maryland stayed stable with about 89,000 workers, the bureau said, but many state em- ployees last year took furloughs of five to 10 days. The District trimmed its full- and part-time workforce of about 44,500 by more than 3,000 people last year, according to the agency.The three jurisdictions reported different figures because employment rolls changeweekly; theCensusBureau recordeda singlepoint intime. Other than the enactment of


the $787 billion stimulus package last year, much of the increase in federal spending could be traced directly to the recession. Total ob- ligations for two major welfare programs — Temporary Assis- tance forNeedy Families and food stamps — reached $68 billion in 2009, a 32 percent increase over 2008. The federal government also


spent $86 billion on unemploy- ment compensation in 2009; per- sistently high joblessness has prompted a federal extension of benefits up to 73 weeks, on top of the 26 weeks in unemployment benefitsofferedby the states.That figurewasmore thandoublewhat the federal government spent on unemploymentbenefits theprevi- ous year. Federal grants to states, local


governments, nonprofit groups and other organizations account- ed for nearly one-quarter — $744 billion — of federal outlays. The majority of that amount was funneledthroughtheDepartment of Health and Human Services. HHS along with the departments of Education and Transportation accountedfornearly80percentof federal grant spending in2009. The$3.2trillionfigurereported


by the Census Bureau did not in- clude interest paid on foreign debt. Nor does it include foreign aid, which traditionally accounts for about 1 percent of the federal budget.Thebureaualsoreleaseda companion report, Federal Aid to States: 2009, detailing the federal grants to state and local govern- ments.


fletcherm@washpost.com morelloc@washpost.com


ALSOINBUSINESS


l Judge clears Visteon reorga- nization: A federal judge con- firmed auto parts supplier Vis- teon’s reorganization plan Tues- day, clearing the way for the company’s emergence from bankruptcy. Visteon, a major supplier of


parts to Ford, said it expects to emerge fromChapter 11 proceed- ings by Oct. 1. The company, based in Van Buren Township, Mich., filed its case in May 2009 as the auto industrywas battered by sharply lower sales and the financial crisis. Visteon said it has slashed its


debt and restructured. Its plan, approved by shareholders and creditors earlier this month, has been confirmed by Judge Chris- topher Sontchi of the U.S. Bank- ruptcy Court. The plan gives bondholders a


roughly 95 percent stake in the new company in exchange for buying back $300 million of stock, and raising another $950 million by backing a stock rights offering. Visteon had considered end-


ing three of its four pension plans. But the Pension Benefit Guaranty Corp., the federal back- stop for pensions, said that the


plan approved Tuesday keeps the pension for 22,000Visteonwork- ers and retirees, and avoids add- ing $500 million to the PBGC’s funding shortfall.


l Fed approves Chinese invest- ment in Morgan Stanley: The Federal Reserve approved a re- quest by a Chinese sovereign wealth fund to acquire up to 10 percent of the voting shares of Morgan Stanley. The Fed, which regulates


bank holding companies, said it cleared the stock acquisition be- cause the China Investment Corp. had stated that it did not plan to seek a controlling inter- est inMorgan Stanley. The order said that CIC, oper-


ating through a nonbank subsid- iary, had in December 2007 in- vested inMorgan Stanley securi- ties under an agreement that gave it the right to acquire Morgan Stanley common stock by last month. The Fed said its investigation showed that ap- proval of the agreement would not have an adverse impact on banking competition in theUnit- ed States.


— Fromnews services


many factors went into the decision, including the fact that the Milwaukee-based motorcycle maker has slashed its marketing spending in recent years amid slumping sales. According to Kantar Media,Harley-Davidson spent about $11million on television ads and othermeasuredmedia last year, half its spending from2007. Although Harley-Davidson isn’t a big spender on traditional


media, the brand is one of the best known in the world with a loyal legion of fans who don the company’s black-and-orange logo. — Associated Press


Faster Forward ROB PEGORARO Excerpt from voices.washingtonpost.com/fasterforward


Gmail adds ‘Priority Inbox’ option Google has a potentially neat new feature named Priority Inbox


that’s designed to help Gmail users tame overloaded inboxes, but I can’t tell you how good it is. Priority Inbox attempts to mark incoming messages important to


you based on which ones you read and answer—a bit like “Bayesian” spam filters that learn from the messages you tag as junk mail. As Google explained in a blog post, messages that get Gmail’s


automated thumbs-up appear in a separate “Priority Inbox” above the rest of your Gmail. You can undo its actions or mark other messages as important by clicking a pentagon-shaped icon in Gmail’s toolbar. Priority Inbox has been drawing rapturous praise to the effect of


“godsend” since Google’s coverage embargo brokeMonday night. But I can’t really tell you if it’s worthwhile: I reservemy Gmail account for online shopping, site registrations, newsletters and other low-priority communications. I have two Google Apps Standard accounts that see more-relevant


messages, but Priority Inbox isn’t turned on in them yet. Google says it may take “the next week or so” for all Gmail and Google Apps users to get this feature. Gmail’s two chief competitors, YahooMail andMicrosoft’s


Windows LiveHotmail, have also made recent additions. At Yahoo, the major changes have been optional Facebook


integration (allowing you to add a comment to a friend’s status update from your inbox) and a Yahoo Pulse social-networking feature. AtHotmail, a redesign brought a few helpful shortcuts. You can


STEVEN PEARLSTEIN Steven Pearlstein is away.His column will return.


click links to see only messages sent by your contacts, those from social media sites such as Facebook, and those with photos or Microsoft Office documents, among other criteria.Meanwhile, a “sweep” feature helps clean out junk mail.


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