While much of the disdain of the banking industry in the last 12 months has been primarily aimed at banks, the scope now seems to be broadening. On Firday, the State of Ohio has filed a lawsuit against Moody’s Investor Services, Standard & Poor’s, and Fitch claiming that they had cost state retirement and pension funds nearly $500 million by approving high-risk securities that failed in the financial collapse.
Richard Cordray, attorney general, said at a news conference “We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters.” Essentially, the lawsuit asserts that the ratings agencies were working with the banks and other financial institutions, helping to create the exotic derivatives that facilitated a market bubble. The inflated ratings led the state to invest in instruments that they otherwise would not have.
Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself. Michael Adler, a spokesman for Moody’s, also disputed the claims, and inferred that the attorney general is more concerned with finding a scapegoat, rather than working together productively. A spokesman for Fitch declined to comment, noting that the company had not seen the lawsuit yet.
To date, the rating agencies are undefeated in court. So far, the agencies have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.
The relationship that the ratings agencies hold with the issuers is complex – although they are expected to make decisions on ratings independently, they also have significant business interests aligned with the firms. “Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.” This incentive laden relationship will bring an issue to the forefront which has been on the backburner for some time – can the ratings from these agencies really be trusted?
