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9486 in the collection
Calpers Sues Over Ratings of Securities
So McGraw-Hill, owner of Standard & Poor's, is getting sued because their credit ratings reports were "wildly inaccurate." When will somebody sue because their standardized tests are also wildly inaccurate?
Here is Standard & Poor's philosophy, as stated by one of their analysts: "It could be structured by cows,and we’d rate it."
Extensions of this remark as applied to McGraw-Hill standardized testing practices come to mind: think manure.
By Leslie Wayne
SACRAMENTO — The nation’s largest public pension fund has filed suit in California state court in connection with $1 billion in losses that it says were caused by "wildly inaccurate" credit ratings from the three leading ratings agencies.
The suit from the California Public Employees Retirement System, or Calpers, a public fund known for its shareholder activism, is the latest sign of renewed scrutiny over the role that credit ratings agencies played in providing positive reports about risky securities issued during the subprime boom that have lost nearly all of their value.
The lawsuit, filed late last week in California Superior Court in San Francisco, is focused on a form of debt called structured investment vehicles, highly complex packages of securities made up of a variety of assets, including subprime mortgages. Calpers bought $1.3 billion of them in 2006; they collapsed in 2007 and 2008.
Calpers maintains that in giving these packages of securities the agencies' highest credit rating, the three top ratings agencies -- Moody's Investors Service, Standard & Poor’s and Fitch -- "made negligent misrepresentation" to the pension fund, which provides retirement benefits to 1.6 million public employees in California.
A Matter of Opinion?
by David Segal
New York Times [Excerpted]
Standard & Poor's, the largest of the credit rating agencies. The company, along with its rivals, Moody's and Fitch, stamped high grades on billions of dollars of debt that went septic as the housing market collapsed. The three have spent much of the last year explaining those grades and other mysteries, like why they gave the Wall Street equivalent of gold stars to the debt of a handful of companies, including Lehman Brothers before it went under and A.I.G. before its rescue. . . .
Until a few months ago, overhauling the rating agencies looked like the proverbial low-hanging fruit of financial industry reform. But legislators have so far been unable or unwilling to truly take on the companies. Now, a number a plaintiff's lawyers are about to try their luck in court. . . .
Like its competitors, S.& P. is paid by the issuers of the bonds it assesses, setting up what appears to be a rather spectacular conflict of interest -- like a teacher appraising the work of the students who pay his salary. To detractors, that apparent conflict explains why so many bonds that were later all but worthless were stamped triple-A. It might also explain the now-infamous back and forth of instant messages between two S.& P. analysts, one of whom says the firm's risk assessment model hasn't captured half the risk of a particular deal.
"It could be structured by cows," the analyst wrote, "and we’d rate it" . . . .
Suits alleging fraud against S.& P. present other complications. Mr. Abrams maintains that the law protects S.& P. and its judgments about the future as long as analysts at the company truly believe the ratings they come up with. "Even if those ratings are wrong, or the company did a lousy job, you can't bring a lawsuit against someone for offering forward-looking predictions," he says.
He returns to the editorial-writer analogy, though he has others. You can't sue economists, he says, or meteorologists.
But there are some differences between a weather forecaster and an S.& P. analyst, and lawyers for the plaintiffs in these cases are sure to point them out. There is little chance that a meteorologist has a financial stake in saying, "It's going to be sunny." The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like.
And all sorts of financial institutions are required by law to rely on ratings. (For instance, there are plenty of money market funds that can’t buy bonds unless rated triple-A.) That elevates the commercial importance of those ratings, which gives them a different legal status than, say, a weather report.
The rating agencies aren't waiting for detractors to argue such distinctions. They have lately been emphasizing the changes they have undertaken voluntarily in recent months. In an interview with public relations executives at McGraw-Hill last week, and in an advertorial that ran in newspapers on Thursday, there was talk about changes that would make the calculations behind ratings more transparent and new steps to mitigate the potential for conflicts of interest.
"This is already a different business than it was two years ago," says Ted Smyth, who runs McGraw-Hill’s corporate affairs.
But fundamental reforms aren't on the table, and the changes that are might be like sending diplomats to a country you've inadvertently nuked. On Tuesday, one of the largest American pension funds, Calpers, filed suit against all three rating agencies, alleging that "wildly inaccurate" ratings had led to $1 billion in losses. The fund had bought structured investment vehicles, a package of securities that include subprime mortgages, which had been given high ratings before all but evaporating last year. The rating agencies, according to the suit, used methods that "were seriously flawed in conception and incompetently applied."
And S.& P. isn't taking fire just from executive suites. By coincidence, on the day of the interview with Mr. Abrams, a noisy protest was staged in front of the company's office in the financial district of Manhattan. About 100 tenants who live in apartment buildings with affordable-housing units walked in a circle, banging on drums, waving signs and chanting "Investigate before you rate!"
A spokesman for the Association for Neighborhood and Housing Development, which led the protest, explained that it wanted S.& P. to know that it was helping real estate developers engage in what it called "predatory equity"-- the practice of buying buildings filled with poor tenants and then using legal tactics to scare them out, so that higher rents can be charged to wealthier renters. The group had already picketed a building owner. Now, because S.& P. had rated some of the deals, it was S.& P.'s turn.
"Our beef is that thousands of tenants have lost their affordable housing because of the pressure of speculative investments that was enabled and encouraged by S.& P. and the other rating agencies," said Benjamin Dulchin, the group's executive director. "And that has to stop."
A year ago, no one would have included a rating agency in a list of picket-worthy institutions, and as the tobacco companies learned, the public image of a corporation can have a huge impact on its fate in court. The sheer quantity of litigation against the rating agencies has exploded, too; the number of cases now pending against S.& P. for ratings-related work is about three times the total number it has faced in the past. Tens of billions are at stake.
NATURALLY, Mr. Abrams is undaunted by S.& P.'s sudden vogue as a bad guy. First Amendment lawyers have a long and storied history of defending speech, by individuals and groups like pornographers and the Ku Klux Klan. Floyd Abrams, as it happens, has never represented a hate group or the publisher of a dirty magazine.
And to those who would lump S.& P. into any group of reviled organizations in need of a good lawyer, Mr. Abrams says the company is actually misunderstood.
"If any of these cases go to trial," he says, "I welcome the opportunity to demonstrate that S.& P. sometimes has gotten a truly unjustifiable bad rap."
— Leslie Wayne
New York Times
2009-07-14
http://www.nytimes.com/2009/07/15/business/15calpers.html
INDEX OF OUTRAGES
Pages: 380
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