Up To Something Good

Via Balloon Juice, Barry Ritholtz reveals People In California Are Officially Up To Something on the bond ratings agencies (emphasis mine)

I poked around with some law firms in California, and started to pick up the rumor that California Public Employees’ Retirement System (CALPERS) was going to drop the bomb on S&P, Moody’s and Fitch. No one would say anything on the record, but it was clear that litigation was being considered as an option against the Ratings Agencies.

Here is the money quote:

The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied…”

“The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible,” according to the Calpers suit.

Now, here comes the fun part: Calpers doesn’t give a rat’s ass about the money. Sure, the financial instruments at hand (Cheyne Finance, Stanfield Victoria Funding and Sigma Finance) have defaulted on their payment obligations. The losses to Calpers are ~!$1 billion.

But that’s not what’s going on here: These Left Coasters want their pound of flesh. They don’t care for the Ratings Agency folks, and consider them a blight on the investment landscape.

The goal of the litigation (as I see it) isn’t to make the rating agencies pay a financial penalty; rather, it is to publicly try them just as the regulatory rules are being rewritten. I also predict that CALPERS is going to attempt to not just win, but humiliate these agencies, call them out in the most embarrassing way possible, trash the senior executives, and make things very uncomfortable in general for these firms.

They don’t want them to merely suffer — they want to destroy their unique position as an Oligopoly, to remove them from having a special status under the SEC rules.

In these sorts of litigations, plaintiff can be very often bought off cheaply. In this case, that won’t happen. An offer a few million dollars — or a few 100 million — won’t tempt them into taking the money and going away. They have as much money as they need to finance this litigation to the long, drawn out, bitter end.

If I was a Rating Agency lawyer, I would be very, very nervous . . .

And I say good for CALPERS. Here's the NY Times article:

As the Obama administration considers an overhaul of the financial regulatory system, credit rating agencies have come in for their share of the blame in the recent market collapse. Critics contend that, rather than being watchdogs, the agencies stamped high ratings on many securities linked to subprime mortgages and other forms of risky debt.

Their approval helped fuel a boom on Wall Street, which issued billions of dollars in these securities to investors who were unaware of their inherent risk. Lawmakers have conducted hearings and debated whether to impose stricter regulations on the agencies.

While the lawsuit is not the first against the credit rating agencies, some of which face litigation not only from investors in the securities they rated but from their own shareholders, too, it does lay out how an investor as sophisticated as Calpers, which has $173 billion in assets, could be led astray.

The security packages were so opaque that only the hedge funds that put them together — Sigma S.I.V. and Cheyne Capital Management in London, and Stanfield Capital Partners in New York — and the ratings agencies knew what the packages contained. Information about the securities in these packages was considered proprietary and not provided to the investors who bought them.

Calpers also criticized what contends are conflicts of interest by the rating agencies, which are paid by the companies issuing the securities — an arrangement that has come under fire as a disincentive for the agencies to be vigilant on behalf of investors.

In other words, I absoutely agree with Barry that the whole point of this lawsuit is to *bury* the ratings agencies and possibly put them out of business.

I won't shed a tear should CALPERS be successful. I say more power to them.