Friday, May 13, 2011

An Unheralded Court Win for Ratings Agencies- For Now

Yesterday's Wall Street Journal carried an article describing a recent decision by a 3-judge panel of the Second Circuit Court which found Moody's, S&P and Fitch not guilty of misleading investors by their ratings of mortgage-backed securities during the financial crisis.

The court wrote that the rating agencies furnished "merely opinions" concerning the securities' credit-worthiness.

The court, observers and the ratings agencies all agree that the decision continues to distinguish what the agencies do from underwriting securities, even when the ratings firms are deeply-involved in advising on the securities' structures. The decision also calls into question the value of Dodd-Frank provisions allowing for lawsuits against the agencies for their ratings.

However, a remark by Doug Dachille a few years ago on CNBC comes to mind. I believe he opined that, in the modern era, when so much information is available online to investors about various municipalities and their various agencies and projects, bond ratings are almost superfluous.

Now that the court has insulated the ratings agencies from culpability for doing a poor job of rating securities, perhaps the ironic result will be that more investors will simply ignore the ratings.

And, in time, perhaps the issuers will forgo, where possible, paying for those ratings. This might be a limited alternative, since many pension and other institutional funds are required to invest in securities having ratings equal to or above a certain grade. Or maybe the existing agencies will be discredited, and new competitors will seek to differentiate themselves by offering more than just 'opinions.'

After all, those who relied on the opinions of Moody's, S&P and Fitch paid dearly for such free advice.

No comments: