22 July 2010

Credit Ratings Freak Out

One of the tidbits in the financial reform bill was a provision making the ratings agencies liable for the quality of their reports, which is a good thing, since they are nominally experts, and expert opinions of this sort are generally subject to lawsuits for fraud and incompetence.

Their protection from lawsuits had a direct correlation with the crap that Moody's Fitch's, and S&P pumped out their door over the past few years.

The thing is, however, that the ratings agencies are completely freaking out over this, and are now demanding that their ratings not be included in bond sales prospectuses:
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law. The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.
What they are saying here is that they are unwilling to actually rate bond issues if there is the slightest chance that their own incompetence or corruption might get them successfully sued.

Well, for most of the rest of us, if we screw up a home repair, leave a cell phone in a patient during an operation, or leave an oil plug off of a car, we are liable, and the world works.

The ratings agencies have no special right to be unaccountable.


John Sundman said...


Post a Comment