Sunday, May 10, 2009
Rating Agency Nonsense
"Faced with a rash of litigation over their ratings of mortgage-backed securities, credit-rating agencies are hoping to rely on a long-time legal ace-in-the-hole: the Constitution. But that protection is being questioned amid allegations that the firms had conflicts of interest that encouraged them to give unduly rosy opinions about the credit-worthiness of securities backed by subprime mortgages. ... US regulators and lawmakers are considering stricter oversight of credit-rating firms, including the way the firms are paid, in an effort to minimize potential conflicts. ... Yet to succeed in court, investors may need to navigate a thorny constititional issue: Are the ratings that the sevices give securities--ranging from triple-A to junk--simply 'opinion' that is protected by the First Amendment? Traditonally, the answer has been yes. Rating firms generally enjoy a free-speech right to 'make informed, thoughtful predictions about the future,;' says UCLA School of Law professor Eugene Volokh, a First Amendment expert. 'That is no different from what newspapers or scholars do.' ... To get around the Constitution, judges have ruled, a plaintiff would have to show that a rating firm not only made false statements, but did so with 'actual malice'--a high legal hurdle. ... Richard Blumenthal, the Connecticut attorney general, sees it differently. Mr. Blumenthal has filed a lawsuit about ratings issued by S&P, though not in connection with mortgage-backed securities. 'The very nature of [rating firms'] so-called speech is very different from the classic First Amendment-protected expression,' Mr. Blumenthal says. 'It's much more akin to an advertisement that misstates the price of an item on sale than a political candidate on a soapbox.' ... 'The claims asserted by the Attorney General violate First Amendment rights and would result in an erosion of analytical independence,' the company said. S&P, Moody's and Fitch have denied wrongdoing in all suits brought along these lines. ... Rating firms, they say, could have a hard time claiming free-speech rights if courts construe their ratings of mortgage-backed securities to be akin to private commercial transactions. 'The more it looks like [ratings] firms were hired specifically to do this one rating for this one company ... the less likely it is that the First Amendment will be applied,' says Larry Ellsworth, a parther with Jenner & Block LLP and a former litgator at the SEC", my emphasis, Nathan Koppel at the WSJ, 21 April 2009.
That rating agencies (RA) have pled this up to now shows how corrupt the SEC is. Will the SEC now say CPA firm opinions should be exempt from suit? Decades ago the SEC should have told the RA it will strip any RA of its NRSRO designation if it asserts a "free speech" defense in a malpractice case. The SEC protects the RA, itself and the RA "clients", the banks. Volokh, that's nonsense. RA are "experts". Like other experts, their "opinions" should be subject to suit. Part of the problem I see is a failure to apply the law to the RA. Which law? 18 USC 225, continuing financial crimes enterprise. Why not apply it? Consider who or what else it would be applied to? "An erosion of analytical independence"? That's a joke, isn't it? The RA sound like CPA firms. They live on the other side of the looking glass. In applying the Sherman anti-trust law, "The statute is directed against a series of acts of several--the acts of combining, with intent to do other acts. 'The very plot is an act in itself.' ... But an act which, in itself, is merely a voluntary muscular contraction, derives all its character from the consequences which will follow it under the circumstances in which it was done. ... No conduct has such an absolute privilege as to justify all possible schemes of which it may be a part. The most innocent and constitutionally protected of acts or omissions may be made a step in a criminal plot, and if it is a step in a plot, neither its innocence nor the Constitution is sufficient to prevent the punishment of the plot by law", Aiken v. Wisconsin, 195 US 194 (1904)(Holmes, J.).