The Ohio Attorney General, Richard Cordray, is swinging sweet, sweet lullabies:
Ohio’s attorney general sued Standard & Poor’s, Moody’s and Fitch Ratings on Friday, asserting that they provided misleading credit ratings that led to hundreds of millions of losses for state funds.
The official, Richard Cordray, filed the lawsuit in United States District Court for the Southern District of Ohio on behalf of five Ohio funds that assert they lost more than $457 million because of “false and misleading ratings” of mortgage-backed securities by the ratings agencies.
Officials at Moody’s and Standard & Poor’s, which is owned by McGraw-Hill, could not be immediately reached for comment. A spokesman for Fitch Ratings, which is owned by Fimalac S.A., had no immediate comment.
I’ve been waiting for this for a long, long time.
matt
They will claim, much like FOX News did down in Florida several years ago, that they have a 1st amendment right to LIE if they so desire…if the AG has a brain he will make them get up and publicly say that so that a proper lynching party can be formed when they are acquitted.
Maude
I like that Moody’s can’t be reached for comment.
Hope that this starts a trend.
Quaker in a Basement
But…but…trying them in a civilian court might give them access to sensitive information!!
Sam
They only gave those ratings because the government forced them too. If we had a truly free market, this never would have happened. Seriously, ask any libertarian…
Zifnab
THIS.
MOAR OF IT
Napoleon
@matt:
That is going to be what they say but I fail to see how what they are doing is different then a Dr. If you go to a Dr. and tell him your chest hurts and he tells you to drink tea and sleep it off, and a few hours later you suffer a stroke, the fact that he was practicing “free speech” by telling you to drink tea isn’t going to cut it. He is being paid in a commercial transaction to offer his patents informed professional advice.
And so was Moody’s, Fitch and S&P.
Omnes Omnibus
Cordray is very, very smart. He would not pursue this unless there is a truly winnable case.
Fun Cordray facts: Five time Jeopardy Champ and editor of the University of Chicago Law Review as a law student.
jk
Moody’s has rated this lawsuit “Caa3”.
kay
@Omnes Omnibus:
He is. He’s really ambitious, too, so that’s good.
gwangung
@Omnes Omnibus: Now THAT gives me starbursts…..
comrade scott's agenda of rage
Even if he doesn’t win, it’s nice seeing somebody’s tax dollars being used, for once, to hold these bastards accountable.
Plus, it also means they’ve gotta spend more dough to pay their legal team.
Zifnab
@Napoleon:
But if we penalize them, they might be afraid to give such bad advice so freely. We can’t criminalize bad advice. We just have to allow as much of it as the market can bare.
R-Jud
@Omnes Omnibus:
“I’ll take ‘A Bunch of Lying Cheats’ for 500, Alex.”
Tax Analyst
I guess the next question would be “So where are all the other state AG’s?”, because pretty much just about every state, county, city, township, hamlet or burg in the country got skinned to at least some degree purchasing crap that had been “A” rated by those Standardly Poor, Moody Son-of-Fitch’s – while their agents were tossing chatty little e-mails back and forth joking about how phony-assed all their ratings assessments actually were.
Li
Finally! It is endlessly galling to me that the same credit agencies that couldn’t tell AAA from FFF still have the power to dictate our worth to the world through their arcane system of individual credit scores.
Seriously, this completely opaque number dictates the shape of our lives in ways that would make Stalin blush. I’m sick of it, and this is coming from someone that has a good credit score, though I can’t begin to tell you -why-.
kay
@Tax Analyst:
They have tried, in various ways, in New York and Connecticut.
Cordray is just taking an aggressive approach. I’m pleased. If he prevails, it opens up a huge issue for other states.
ksmiami
Ding Ding Ding – we have a winner!!! Again a lesson in never let for profit quasi-private institutions be the regulators, never ever ever
cyntax
Time to buy futures in pitch-forks…
Lowkey
Yeah, the ol’ “we have a first amendment right to give misleading advice!” defense. Let them try that shit in front of a jury today. It won’t take Cordray to sell a “um, fraud isn’t a right, dumbass” prosecution to the jury.
This is how we start to get these bastards. Gut Moody’s, S&P, and Fitch’s with a gargantuan class-action on the back of a successful prosecution precedent, and then reconstitute or replace them with companies or agencies funded by trading fees or taxes. Remove the conflict of interest, and then let the Wall Street wizards try to figure out a new to fuck us.
/rant
Lowkey
@Lowkey:
Er, IANAL, I expect I meant plaintiff action instead of prosecution. Court. Thingy. Sigh, where’s my lawyer when I need him?! I haven’t kicked him out of my apartment yet. Lionel, get over here and make me sound smart and correct!
Savage Henry
I would love it if this led to a finding on behalf of the state and the rating agencies suing the banks for giving them fraudulent information. If we can get all of the criminals in our ponzi financial system to turn on each other, that would be spectacular. Kind of like the ending of Reservoir Dogs.
Seeing that our government has been thoroughly captured and is therefore impotent, this is a great way to get some ass-kicking for these creeps.
Savage Henry
I would love it if this led to a finding on behalf of the state and the rating agencies suing the banks for giving them fraudulent information. If we can get all of the criminals in our ponzi financial system to turn on each other, that would be spectacular. Kind of like the ending of Reservoir Dogs.
Seeing that our government has been thoroughly captured and is therefore impotent, this is a great way to get some ass-kicking for these creeps.
sparky
hmmm…dunno. counts are: complaint asserts the agencies had a duty to the buyers that they negligently breached, and Ohio statutory violations.
dunno about the former and in any case it’s unlikely that this would prevail, as there’s no way the pension funds can pretend they were unaware of what was going on (that would open those acting as agents or on the board to fiduciary duty suits). can’t speak as to the latter.
speculation, but it seems that this was a way to get some headlines and probably some chump change (30 mil or so) and perhaps some kind of a trophy ala Cuomo. this was a built in bias that everyone in this system knew existed. peasants didn’t need to know about it just like peasants don’t need to know where Treasury doled out their dollars.
pipe down and go back to yowling about Palin, peasants.
Tax Analyst
kay said:
Thanks for the info, kay. Yes, I’m also pleased to see somebody take the lead here and hope he has some success.
Tonal Crow
@Lowkey:
A judge will decide the question of whether this is a legally-recognized defense. A jury (if the agencies request a jury trial) will examine the evidence, deduce facts from it, and apply the law to them to decide whether the agencies are liable. (Or maybe they’ll just break out the pitchforks; hard to tell these days).
That said, I think that the 1st Amendment defense is almost frivolous. Ratings agencies are not, as they contend, journalists paid to offer mere opinions that people can take or leave. They are professional consultants paid to offer analyses of securities (“ratings”) by the securities’ issuers. The issuers often need ratings so that they can sell their securities to buyers who require ratings by contract, or by regulation. Further, the ratings agencies know that not only direct buyers, but indeed the entire debt market — and thus, the entire economy — relies upon their ratings. Ratings, thus, aren’t in the same category as journalists’ interpretations or pundits’ bloviations. They are, instead, akin to professional opinions from doctors, lawyers, engineers, and so forth — all of whom can be liable for negligence.
kay
@Lowkey:
It’s true. If it gets to trial, we can have a jury full of pissed-off Ohio pensioners.
I wouldn’t want to get in their way. I still believe the whole financial services industry has no clue how loathed they are, by the peons.
Lowkey
@Tonal Crow:
Aha, someone with knowledge of Advanced Legal Thingies! Thank you, Tonal Crow. Are you gainfully employed/happily housed? My current unemployed homeless lawyer sofa-rider isn’t answering his pager when I need to sound knowledgeable. I could be in the market for a new Lionel…
Lowkey
@kay:
Dunno about that. I think they know precisely how loathed they are. Little people have always detested Wall Street, and vice versa. It’s one of the reasons they buy off their politicians so completely. They need Capitol Hill to protect them from the popular revolt every time they finish another round of Robber Baronning.
Tonal Crow
@Lowkey: Right now I’m playing hooky from the boss who (oh-oh) happens to (here he comes) inhabit the same body (slap!). I better get back to the “gainful” stuff, which isn’t law, but software.
Lowkey
@Tonal Crow: LOL, well, I wouldn’t want you to have to fire yourself, the ingrate.
Ken
O-H
sparky
@Tonal Crow: a good argument but i think the no liability side has the better argument (as well as the money and power).
1. rating agencies are not lawyers or doctors. they are not regulated nor are the employes personally liable as a doctor or a lawyer would be for malpractice.
2. relatedly, there are no professional standards for them to fall below. ergo they cannot be negligent as to their occupation any more than General Motors can be negligent for going bankrupt for making crap cars (note i do NOT mean defective cars, which is a different issue).
3. the practice that got them in trouble was a well-known part of the entire structure. that the conflict swallowed the entire process was in a sense a feature not a bug because it had always been a part of the system.
4. related to this, the participants, including the plaintiff funds here, knew of, understood and participated in this system. that they were left holding the bag is unfortunate but i rather doubt anyone will be inclined to believe a claim of “we didn’t know” because (a) it’s not true and (b) that would make them liable to their shareholders/creditors/whoever they have a fiduciary duty to.
5. this is more speculative, but i think a reasonable argument can be made that the ratings were recognized within the industry, including the holdersas formalities akin to proper recording of mortgages. no sophisticated party to these machinations would think a rating requirement was anything other than a pro forma filing requirement.
the upshot is this is another of those actions like that BoA/SEC suit–all hat and no cattle. that said, nothing wrong with filing it.
kay
@Lowkey:
I disagree. They completely buy their own marketing. When they say they are the best and the brightest, so should be paid astronomical sums, they believe that.
A lot of Americans did too. We weren’t even questioning what they were paid, ever. Yet, we listened to them value every other profession or trade. There was no cognitive disconnect when these same overpaid Wall Streeters complained bitterly that the UAW were making 25 an hour. None. Americans nodded their heads in agreement.
Lowkey
@sparky: okay, at least my dumb statement got me an interesting discussion. Let’s assume for a moment that your argument proves predictive. Does this mean that there would be a possibility that the pension funds could be proven to be in dereliction of their fiduciary duties for using the ratings as actual ratings? Not the game changer I’m hoping for, but it could certainly scare the money into demanding a better ratings mechanism…
Lowkey
@kay: Well, I agree with that first part. There’s no denying that they certainly believe they deserve their masters-of-the-universe paydays. And the 27 percenters and free-marketeers were certainly nodding along with the union bashing. But I honestly doubt it’s a majority opinion. Most of Palin’s Real ‘Muricans… flat staters, farmers, small town people… have you heard them talk about Wall Street? If there’s one thing your average Blue Stater and your average Red Stater would agree on (not that we’ll ever admit it), it’s that we think that, at any given moment, Wall Street is probably fucking to the tune of billions.
Lowkey
@Lowkey: er… us! Fucking us to the tune of billions. Gads, I suck today.
R-Jud
@Ken: I-O.
I wasn’t going to reply, but it started bugging me that nobody else had.
Brachiator
@sparky:
This is not entirely true. There are accounting standards and regulatory bodies that allow firms like Moody’s to do business:
And the actions of Moody’s is not just like a dealership selling a car. A better analogy would be you going to buy a car, and the price you pay is based on the rating that a company like Moody’s gives the car. Later, you find that the dealer paid to get a better rating, but the car is junk. Ratings agencies can seriously damage a company’s reputation and inflict financial harm on the company and potential investors.
If they want to play the First Amendment game, then some of their practices amount to financial libel or slander.
Tonal Crow
@sparky:
Tort claims have never been contingent upon the defendant being “regulated”. And ratings agencies *are* regulated by the SEC, http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organization , and regulations sometimes require that certain buyers (e.g., money-market mutual funds) buy only securities having certain ratings.
Sure there are. There is a great deal of theoretical and practical material on securities risk. That most of the industry used less-than-best-practices for years doesn’t excuse them, anymore than it would excuse doctors if, in some perverse turn, most of them prescribed bed rest for heart attacks.
Isn’t this largely assuming the conclusion?
So? At one time, one-piece solid steering column rods were a well-known part of every car’s structure. Then someone got the bright idea of suing the manufacturers for negligence because they knew that the things were spears to the heart in accidents. The manufacturers lost, and today every car has a (much-safer) collapsible steering column rod.
This is an argument for contributory negligence, not for the ratings agencies to escape all negligence liability.
In other words, everyone knew that the ratings were worthless labels, so the label-printers shouldn’t be liable for their worthlessness, despite apparently not having exercised due care in producing them. This might fly in some courts, but it won’t do much for the agencies’ future business.
BTW, the proper recording of a mortgage is not a formality; in many jurisdictions a mortgagee cannot foreclose on an unrecorded mortgage.
Koz
Yeah, right. If other people’s money & property are up for grabs, why shouldn’t we expect the savvier and more politically connected to join in the fun.
kay
@Lowkey:
Oh, God, I wish it were true. It isn’t. I live in a red area, and they’re all “let the buyer beware”.
They can get ripped off personally and still they’ll defend Bank Of America, from all comers.
I have a friend here who calls them “volunteer lobbyists” and it’s true. We had a megafarm come in here, so we appealed to their interests as property owners. We showed them film from Iowa where the a huge megafarm came in, polluted the ground water, fouled the air, and made the surrounding private property worthless for sale.
They were staunchly defending the “right” of the out of state operator to come in and destroy their 1. property value and 2. quality of life, because it’s bidness, and bidness is next to sacred. Not even self-interest would sway them.
Tonal Crow
@Tonal Crow: Oh yeah, I forgot the usual disclaimer: this is blogging, not legal advice. Consult your favorite lawyer for legal advice.
Lowkey
@kay: Kee-ripes. Wasn’t there a time when heartland folks feared and loathed slick big-city operators and banksters?! That was generally a smart play. Fox really is making America dumber.
kay
@Lowkey:
Right.
We said “you won’t be able to use your back porch”. “You will be inundated with flies and stench and you have a well and you drink from it“. No sale.
We have megafarms as far as the eye can see, and they stink, and they don’t employ locally, and they reduce the value of any property downwind, and we had to spend thousands to come up with a county “plan” in case one of the massive manure levies break and the whole watershed is destroyed.
There’s a really old legal doctrine called “nuisance” and it’s meant to allow a property owner to defend his value when he has a bad neighbor. You can sue the bad neighbor for his activities harming the value of your land. We found out that my conservative state legislature had essentially voided “nuisance” as to megafarms, so there’s no legal recourse for the damaged property owners. I was shocked.
But the Iowa operator is making money, so we saved capitalism. Yipee.
Lowkey
@kay: Oh, that’s pathetic, and frankly sad. Private property rights and NIMBY used to be Republican touchstones. Oh, well, more values up for us to grab.
gex
@kay: In 2006 or 2007, there was some consideration or legislative changes that would have allowed financial service jobs to be outsource the way manufacturing and IT had been outsource before them. It turns out Wall Street did not think that paying financial analysts in India less for the same work was a good way to maximize profits. They pretty much view themselves as essential.
kay
@gex:
I’m embarrassed to admit I commented on that subject on the Washington Post site.
I suggested we outsource our executive positions in finance to Bangalore, in the interest of free trade, markets, whatever label you like. This suggestion was not well-received.
“We’re NUMBER ONE, KAY, LIBTARD, THAT’S WHY!”
I don’t see any reason we can’t find inept managers to blow up the economic system at a much better price. We’ll bring back skilled trades and outsource top-level finance. Swap.
sparky
@Brachiator: i agree that it’s possible to make the argument that there is a kind of regulation, but that regulation is a far cry from (1) effective oversight of the entities and (2) the establishment of a set of guidelines in the production of ratings. in other words, this minimal framework doesn’t constitute a set of enforceable rules.
NB: as Tonal Crow said, NOTHING here is legal advice nor should it be taken as such. i should also add that i am NOT a securities lawyer or an Ohio lawyer so who knows how it might play out there.
Chuck Butcher
@sparky:
Right, but this doesn’t assert criminal law – including SEC violations. It asserts that a service offered as having value and relevance was in fact neither and that a position of influence was tacit in the market. Rating agencies took money to be regarded as authorities, in fact took issuers money to be so regarded.
They lied. Lawyers might stop this at a judge, but once it’s in court??
I’m a constructon contractor not a lawyer, I don’t even play a lawyer in commercials.
Brachiator
@sparky:
I don’t see that the issue of “enforceable rules” is all that relevant, or makes what Moody’s does simply rendering an opinion as though it is nothing more than an arbitrary or subjective value judgment.
The ratings determine the selling price of bonds and stocks and the interest rates that are paid. The interest rates supposedly represent a realistic assessment of risk. The difference between junk bond and AAA supposedly represents some measure of value. Over some defined period of time, a company rated low and a company rated more highly can be examined (balance sheets, etc) to see if some defined measure of value (based on generally accepted accounting principles) validates the ratings.
If the ratings agencies want to claim that their opinions don’t mean squat, then there is no reason for anyone to pay for them, no reason for anyone to adhere to them, and no reason for the ratings companies to exist. Any fees that they have been paid to date should be forfeit.
Also note that by the grace of the SEC the existing companies have a monopoly on this service. They simply can’t have it both ways: they can’t claim that the service they render is as worthless as a horoscope but that they deserve near monopoly status and exclusive rights to be able to render, and to be paid for, their opinions.
sparky
@Tonal Crow:
a. i agree with you we are just blathering not offering legal advice or even predictions.
b. as i said in another response, i agree that the argument from regulation could be made. i just don’t think it’s a good one because AFAIK there’s no evidence that this regulatory regime provided anything in the way of enforceable standards. but i would be happy to be wrong here.
c. i disagree with your argument about standards. first off the materials you cite have no force as they are not standards that are actually enforceable through professional conduct procedures. second, and perhaps more importantly, your example seems a bit off. if all doctors did prescribe bed rest for heart attacks, no doctor would be liable for prescribing it.
d. i don’t understand your point about assuming the conclusion. all i meant was that for example in a law firm the firm and the individual lawyer could both be liable for malpractice. i’m not aware of any similar idea for the raters.
e. i take your point about the steering wheel, but interestingly, that highlights my distinction between GM making bad decisions and GM making a part that had a design defect. the latter is actionable because there is another design for the same part that would serve the same function. the former, however is not a product as such but rather an industry practice that was known and accepted by all the participants. one might as well sue the NYSE for defective design of a market.
f. i wasn’t making an argument for contributory negligence, though i suppose one could. my argument went more to the question of the duty owed. a pension fund is not jane q public and as a sophisticated market participant i don’t think much would be owed to it as far as care goes.
g. i thought we were talking about what might happen with this lawsuit, not the agencies. whatever reputational injury they could suffer has already occurred. that they are still in business, still doing the same things even after these practices became public knowledge, does, i think provide rather strong evidence that this practice was not aberrational within the relevant community.
h. i agree with you about recording–it’s necessary but it is also a formality.
sparky
@Brachiator: i think we are talking about two different things. i can agree with your points and still say it’s not clear that they are liable because they didn’t do anything actionable.
the ratings are only worth what people pay for them, true. but their value didn’t come about as a consequence of some external rule or obligation. it came about because people writing deals wanted some kind of CYA. that it’s actually worthless doesn’t mean anything one way or another because the raters don’t have any independent obligations. in fact, if you want to get sticky about it you could probably argue that the whole thing was set up just this way to avoid creating any obligations. in other words, because the issuer not the buyer pays for the ratings, there’s no way the rater can be liable to the buyer.
Nob Akimoto
The only problem with this is that it was really the fact that the credit rating agencies were required to disclose how they made their ratings that made it possible for the folks selling financial products to come up with ways to game the system. That is, until we screamed loudly that we had to have transparent ratings for investment items, it was a bit more difficult to tailor formulas to create ostensibly “AAA” rated securities.
Nowadays it’s pretty easy for a seller to do this. Not that rating agencies are innocent of course, but they were kind of made into unwitting accomplices of unscrupulous people because their models were forced out into the open where folks could find ways specifically to rig them.
Brachiator
@sparky:
I’m not saying it’s clear that they are liable. However, I think that the states can go after them and try to prove a case. And I don’t think that the ratings agencies have much of one.
But what the ratings agencies provide is more than CYA. Their ratings set the prices for bonds and the interest rates for these instruments. They determine whether governments will be able to get funds.
On the other hand, if the ratings agencies want to claim that their ratings are really nothing more than arbitrary — and ultimately meaningless — opinions, then I think that the SEC could put them all out of business tomorrow. They could also make a good case that every dime that they have earned has to be returned to those who paid for their services.
Either the ratings agencies have a function in providing a meaningful service to financial markets, or they are the equivalent to the astrology section in the daily newspaper, for entertainment purposes only.
LindaH
Cordray is really doing his job. First he sued and settled with AIG for $115 million. Then he sued and settled with Marsh and McLelland for $400 million. Thus far he has managed to get back manged to get back about 2 billion dollars that were lost in investments for the retirement and Workers’ Comp funds. I’m glad he’s getting in ahead of every other state, because as an Ohio government employee, I have been counting on my pension. Plus, those guys deserve to pay for what they did.
Barry
Brachiator
“Also note that by the grace of the SEC the existing companies have a monopoly on this service. They simply can’t have it both ways: they can’t claim that the service they render is as worthless as a horoscope but that they deserve near monopoly status and exclusive rights to be able to render, and to be paid for, their opinions.”
Having it both ways is what Wall St *does*, as far as I can tell.
Tonal Crow
@sparky: Industry practice, even universal industry practice, is only evidence of the appropriate standard of care. It is not conclusive of the standard of care. Peer-reviewed literature and judges’ own understandings also go into the mix. Thus, though it is extremely common for doctors to not wash their hands between patient examinations, that conduct violates the applicable standard of care, which, in that case, comes from peer-reviewed lit and judges’ own understandings of infectious disease.
Also there’s the issue of negligence per se. I am not at all convinced that the ratings agencies did not violate some statute or other (perhaps in the area of deprivation of honest services or bank fraud). Any such violation would raise a case of negligence per se, obviating the need to show violation of the applicable standard of care.
And on the idea that the agencies’ only possible liability is to issuers, I don’t think that’s correct, and even if it’s correct, I don’t think it helps the agencies. Decisions involving auditors’ third-party liability (e.g., Credit Alliance Corporation v. Arthur Andersen) probably apply to the agencies. Also, some states use the “reasonably foreseeable” rule for third-party liability. Also, even if the agencies escape direct third-party liability, they probably will get hit indirectly in joint liability with the issuers.
Finally, to unwind to the original topic, I don’t see the agencies’ 1st Amendment defense holding any water.