Ratings Companies Own Downgrade

“The ratings provided little or no value.”

-Financial Crisis Inquiry Commission Chairman Phil Angelides


Here’s a fascinating little tidbit:

“Largely overshadowed in the Dodd-Frank overhaul, 18 of the 848 pages strike at defenses that have allowed Moody’s, Standard & Poor’s and Fitch Ratings to defeat every ratings lawsuit they’ve faced. The bill says ratings aren’t protected by the First Amendment as free speech or by securities laws that say opinions can’t be wrong.

“Activities of credit rating agencies are fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, securities analysts and investment bankers,” the law says.

Dodd-Frank opens the doors to new entrants. It ends the federal requirement that banks buy securities defined as investment grade by just a handful of companies that the U.S. Securities and Exchange Commission designates as qualified for this purpose.

These 10 companies, including Fitch, Moody’s and S&P, are called Nationally Recognized Statistical Rating Organizations, or NRSROs. The law requires the SEC and other agencies to develop new credit standards in two years. It also makes ratings companies verify any outside data they use to arrive at their decisions.

It appears that the nonsensical First Amendment defense, successfully used by the rating agencies on eeejit Judges, is no more.

Here’s the really amusing part:

“S&P, Moody’s and Fitch are all fighting how Dodd-Frank saddled them with the same liability that auditors and investment bankers face as experts. The companies could lose lawsuits when clients prove negligence or sloppy work, says Michael Perino, a securities law professor at St. John’s University in New York.

“This is Arthur Andersen-type liability; it can bring your company down,” says Catherine Odelbo, Morningstar’s president of equity research, referring to the accounting firm that shut down after being convicted of obstructing justice in an Enron Corp. case in 2002.”

Arthur Andersen-Type Liability . . . Wouldn’t that be nice . . . ?

The full article is worth a read


Credit Ratings Can’t Claim Free Speech in Law Giving New Risks
John Lippert
Bloomberg, Dec. 8 2010

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