Seldom do I write a blog or post, merely because those on Seeking Alpha do such a splendid job of covering all the bases. However, the fact that CalPers has sued Moody's (MCO), Fitch, and Standard & Poor for providing perfect triple AAA credit ratings on junk, close to when it was trading as junk, ticked me off so much I felt it necessary to comment.
Remember, CalPers represents the biggest public pension fund for the public employees of California, which is effectively bankrupt and is now coining their own fiat money which equates to IOUs. If it wasn't from a big and important group representing the employees of the State with the biggest GDP which is in dire straits, this issue would go to the courts and be passed off in favor of the ratings agencies in a ruling roughly equating to "Nice try, but you're little people."
However, as is, the court system run by California employees is not liable to deny a fair hearing. This is bad for the ratings agencies. Most likely, the unseemly face of how ratings agencies get bribed to rate debt issues will be revealed yet again. But instead of it being spoken of mockingly by a few on Seeking Alpha, it will be served up to thousands of public employees that right now already feeling a bit angry at what government is not doing (even though they are in it).
It is almost a prima facie argument that the ratings agencies were either complicit or delinquent in their so called duties. Although CalPers may sue for their ratings on SIVs which lost them a cool $1 billion or so, it could likely set a precedent for many other lawsuits.
CalPers summed up their argument pretty clearly by stating the ratings agencies "made negligent misrepresentations" to the pension fund and that indicating there was almost no risk of loss, "proved to be wildly inaccurate and (risk was) unreasonably high." It is hard to disagree with them considering they are liable to loose $1 billion out of a $1.3 billion investment in AAA rated debt instruments.
It is a shame that there hasn't been any real reform in the ratings agencies yet. Even though they have been cited for conflicts of interest in the fact they are paid by issuers to rate debt instruments. Also numerous economists have gone to great lengths to show that they heavily contributed to the out of control mortgage mess by being complicit in ordaining all manner of derivatives qualified in their ability to grant junk bonds absolution making them AAA mortgage bonds.
The ratings agencies are familiar with onerous governmental lawsuits. Just last year they were under siege by states and municipalities for blatantly granting corporations with less credit worthiness a higher rating than states and municipalities were getting. Rather than admitting that they were once again overstating the credit worthiness of the corporations that paid them to float their less than sterling bonds, they rolled over and have been rating states and municipalities in higher regard. (I wonder if anyone will sue them for misrepresenting Californian bonds before they stopped paying their employees?)
Needless to say, the ratings agencies certainly deserve all the heat they will get for this lawsuit, and then some. California may not win considering the dire results it would pose to the ratings agencies, but if it results in any reform at all it will have been worth it for the other 99% of the people who got hurt due to their blatant misrepresentation and self serving assessments that left our economy in tatters.
So I am now wondering this: Since this is mainly a diatribe about conflict of interest, should California judges refuse to hear this because it is a conflict of interest since they are in CalPers? Questions, questions, questions. Certainly if the ratings agencies were a judge, they would have no problem with such conflicts of interest.