Wednesday, July 15, 2009

Of Course We Gave Them a Good Rating...

The nation's biggest public pension fund has now filed suit in California over $1 billion in losses it claims were caused by "wildly inaccurate" credit ratings.

The California pension fund, known as Calpers, says that highly complicated structured investment products that had been given a AAA rating are now worthless.

Calpers contends that in giving these securities their highest credit rating, the three top ratings agencies -- Moody's Investors Service, Standard & Poor's and Fitch -- "made negligent misrepresentation" to the fund.

Moreover, Calpers, in its suit, cites conflicts of interest by the agencies that rated these securities. Not only were they paid by the companies issuing the securities, it says; but they went one step further: All three agencies received lucrative fees for helping to structure the deals -- and then issued ratings on the deals they helped create.

Nice work if you can get it, right?

We'll see what the agencies have to say for themselves (the New York Times said that they either did not respond to request for comment or said they could not comment).

But in the meantime, the folks at Calpers -- and the credit rating agencies -- should bone up on how conflicts, even small ones, bias the judgment of people we rely on for financial advice. To do that, read one of George Loewenstein's papers here.

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