Sense on Cents

When investors lose their shirts, what is the next thing that happens? They get pissed. Then what? They call their lawyers and file lawsuits. While individual firms on Wall Street face lawsuits all the time, it is not often that the institution of Wall Street itself is sued.

In late January, we witnessed a massive lawsuit filed on behalf of the Federal Home Loan Bank of Seattle against a large number of Wall Street banks. To reference that suit, read here. Today, The Wall Street Journal highlights Connecticut Attorney General Richard Blumenthal to Sue Moody’s, S&P, the pillars of the Wall Street ratings game:

Connecticut Attorney General Richard Blumenthal will announce a lawsuit Wednesday against rating firms Moody’s Investors Service and Standard & Poor’s alleging that they knowingly assigned “tainted ratings” for “risky investments” backed by subprime loans.

In a press advisory, Mr. Blumenthal’s office said the attorney general will discuss the lawsuit at a press conference in Hartford at 11:30 a.m. EST.

The practices outlined in the lawsuit enabled the worst economic downturn in the nation since the Great Depression, Mr. Blumenthal said.

Mr. Blumenthal told Dow Jones Newswires in November that he was planning to sue the major credit raters over ratings that he alleges enabled the “structured finance debacle” in recent years.

At the time, Mr. Blumenthal said he may pursue a lawsuit on behalf of state pension funds or as an extension of investigative actions by his office.

In 2008, Mr. Blumenthal’s office separately sued Moody’s Corp., the parent of Moody’s Investors Service; McGraw-Hill Cos., the parent of Standard & Poor’s; and Fimalac SA’s Fitch in state court in Connecticut.

In those lawsuits, Mr. Blumenthal alleged that the major rating firms “systematically and intentionally” gave lower ratings to states, municipalities and other public entities than corporate and other forms of debt with similar or worse default rates. Those suits are pending.

While Blumenthal is filing suit, what have financial regulators and our leaders in Washington done to address the inherent conflicts in the ratings game? De nada.

In fact, the ratings game is nothing short of the great enabler and facilitator for Wall Street. I highlighted as much last June in writing, “Wall Street’s Great Enabler Dodges a Bullet”:

Did Barack Obama and team give a sly and subtle wink to Wall Street that ‘the game goes on’ and the ‘fix is still in?’ I believe they did.

Many analysts, myself included, view Obama’s proposed regulatory reforms as a combination of ‘reshuffling the deck chairs’ and ‘cosmetic surgery.’ In the process of those maneuvers, the rating agencies – Wall Street’s Great Enabler – went largely untouched.

The rating agencies business model presents massive conflicts of interest for all involved. The greatest conflict centers on the fact that the rating agencies’ stream of revenue remains beholden to the Wall Street banks. Without addressing that issue, any dialogue on this topic holds no water.

While I respect Blumenthal for bringing this suit to address issues within the ratings agencies, I am not optimistic this action will bring real change. Why? How have the courts and regulators handled issues regarding investor protection? To a very large extent the message to investors is a resounding “CAVEAT EMPTOR”, that is “BUYER BEWARE”. You had better be looking out for yourself.

Sense on Cents will try to help you along the way!!

LD

This entry was posted on Wednesday, March 10th, 2010 at 1:22 PM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.