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Connecticut Sues Rating Agencies

|Includes: Moody's Corporation (MCO), SPGI

Attorney General of Connecticut, Richard Blumenthal, has announced plans to sue the rating agencies for losses sustained by pension funds:

Connecticut plans to join Ohio in suing Standard & Poor’s, Moody’s Corp. and Fitch Ratings for their “negligent, reckless and incompetent work” in grading investments made by state pension funds, according to Attorney General Richard Blumenthal.  
Connecticut and “a number of other states” are preparing legal action against the credit rating companies, Blumenthal said today in a Bloomberg Television interview.
“We want money back for our taxpayers as a consequence of these misratings,” Blumenthal said. “They gave AAAs to financial instruments that deserved much, much less. They were the enablers to this structured finance debacle.”
Seriously, they are figuring this out just now?  After days of committee hearings in DC earlier this year and late last year - from which nothing ever materialized except lengthy disclaimers by the rating agencies - Connecticut jumps on this bandwagon now? 

What are these disclaimers you ask?  Well S&P says:
The ratings and credit related analyses of S&P and its affiliates and the observations contained herein are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or make any investment decisions. S&P assumes no obligation to update any information following publication. Users of the information contained herein should not rely on any of it in making any investment decision. S&P's opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
Moodys is a little better:
CREDIT RATINGS ARE MIS'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

Users should not rely on it?  But aren't these ratings used to determine risk weighting and capital/reserve requirements?  Aren't they ised to determine what the Fed will accept as collateral (unless you are TBTF)?  Oh yeah, to boot aren't the agencies exempt from Reg FD and privvy to non-public information?  Yes, they are (from Reg FD):

§ 243.100 General rule regarding selective disclosure.

(a) Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to any person described in paragraph (b)(1) of this section, the issuer shall make public disclosure of that information as provided in § 243.101(e):

(2) Paragraph (a) of this section shall not apply to a disclosure made:
(iii) To an entity whose primary business is the issuance of credit ratings, provided the information is disclosed solely for the purpose of developing a credit rating and the entity's ratings are publicly available;

Anyone else tired of this rating agency crap? 

While I do not agree with the timing and reason for the suit (how many pension funds did the requisite due diligence on the securities they bought beyond the yield calculation), the agencies MUST be held accountable.

I tried to raise this issue with the state in 2001 when the agencies were trashing the pipelines, utilities and telecom and it fell on deaf ears.

Perhaps now, with the evaporation of billions of dollars (and counting), something will be done.  Unfortunately, I doubt it.


Disclosure:  No positions in any of the mentioned companies.