Moody's and S&P need to be reined in

It won't make you popular. But there has got to be a demand for lawyers willing to stand up for Moody's Corp. and Standard & Poor's, whose ridiculously high grades for hopelessly risky mortgage-backed securities helped trigger the worst recession in at least a generation.

Because they got it so wrong while claiming to be so good at assessing risk, they have been so sued that they could probably populate a small city with the lawyers it takes to defend them. OK, maybe a neighborhood.

This week Connecticut Attorney General Richard Blumenthal sued S&P and Moody's, again. Last time, in 2008, he sued those two as well as Fitch Ratings for their two-track system that gave low grades to public debt simply because it was government- issued while giving extra points to corporate debt. Those cases are pending.

This time Blumenthal is complaining about the unreasonably optimistic assessments they handed out to mortgage-backed securities. That helped inflate the housing bubble until the truth popped it, costing billions of dollars to pension funds and other investors. The harm to the economy at large was incalculable.

The ratings companies were pretending to be independent and objective when they were really currying favor with the issuers, who paid them hefty fees and shopped for the most favorable rating, the suit alleges. The firms claimed their scores were trustworthy when they weren't in the least.

Hiding Truth

Blumenthal told Bloomberg TV the companies changed their methodology, retaliated against employees bent on truth-telling and changed their compensation and compliance plans in their quest for more revenue and market share.

“They buckled under to their clients,” Blumenthal said.

Connecticut joins Ohio, which sued in November on similar claims. And investors, including the giant California Public Employees' Retirement System pension fund, are suing the agencies and the investment banks involved in selling the securities.

Spokesmen for Moody's and McGraw-Hill Cos., which owns S&P, told reporters that the suits had no merit and predicted their firms would win in court.

Rating firms have for years claimed a First Amendment shield against such cases, saying that free-speech protections apply to their opinions. And while that has often worked in the past, a federal judge in New York said last September that it didn't apply to opinions that weren't widely disseminated. That case is still in court.

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