Thursday, July 16, 2009

Calpers Sues Rating Agencies -- Rumble In The Alley After The Dance Ends Badly

Calpers sues Rating Agencies. Rumble in the back alley after the dance. Moody’s (MCO), Fitch (FIM) and McGraw Hill (MHP) which owns S&P are about to feel the wrath of one of the largest financial institutions in the world. Calpers has a long and legitimate interest in corporate governance.

Calpers possesses the resources and moral turpitude to press the lawsuit aggressively. Despite supposed regulatory change, the Obama administration does not seem to have the rating agencies on their radars. Calpers does. Calpers is said to have billion dollar losses. Calpers is suing for damages which are still unspecified.

How will the lawsuit modify the way rating agencies operate. While Calpers and others may extract financial penalties they will almost certainly want changes to the way rating agencies operate. The rating agencies frequently have entire product lines of associated analytical tools. What integrity will these products really have when a rating is found to be so inadequate that it causes economic pain? The rating model will be at risk. The entire analytical offering will be at risk.