The lawsuit filed by the Connecticut state attorney general against rating agencies Moody’s, Standard & Poor’s and Fitch over their unduly tough marks for state and municipalities (their policies have claimed the ratings are uniform) is peculiar indeed. While I am sympathetic with the wronged public issuers, the fact is that the rating agencies enjoy a repeatedly upheld First Amendment exemption from liability (they have asserted, successfully, that their ratings are mere journalistic opinion, a claim that is clearly utter rubbish but that the courts nevertheless take seriously.
However, the AG is pursuing an antitrust claim. That may be a novel theory, but will it succeed? Unless the AG can surmount the First Amendment argument, this lawsuit will merely serve as harassment.
Connecticut Attorney General Richard Blumenthal sued Moody’s Corp., Fitch Inc. and Standard & Poor’s parent The McGraw Hill Cos. for allegedly giving municipal bonds lower ratings than comparable corporate or structured debt…
Blumenthal, the state’s top law enforcement officer, has been conducting an antitrust probe of the three credit-rating companies. Last month, he said firms that rate U.S. municipal bonds “knowingly and systematically” gave the securities lower grades, raising costs for state and local governments….Blumenthal said the dual standard benefited bond insurers, investors and the agencies themselves.
“This rating charade created a Wall Street shell game constructed by the ratings agencies for the benefit of the bond insurers,” he said, adding that bond insurers profited from unnecessary premiums and interest paid by taxpayers…..
State officials and regulators have criticized New York- based Moody’s, New York-based Standard and Poor’s and Fitch, a unit of Paris-based Fimalac, for using a scale that raised borrowing costs by holding municipal bonds, whose 10-year default rate was 0.1 percent between 1970 and 2006, to a higher standard than corporate and sovereign debt.
Many issuers bought bond insurance to improve their rating, a strategy that backfired this year when some guarantors lost their AAA ratings amid subprime mortgage-related losses.
The Connecticut probe has included whether the firms rank debt against issuers’ wishes, then demand payment, or threaten to downgrade debt unless they’re awarded business to rate all of an issuer’s securities, Blumenthal has said.
He has also been scrutinizing links between Moody’s and its largest shareholder, Warren Buffett’s Berkshire Hathaway Inc.