Wednesday, June 3, 2009

“Ratings”, a general counsel for Fitch once told a congressional committee, are “the world’s shortest editorials”

From Alphaville:

"Rating the first amendment

Floyd Abrams is defending the rating agencies.

Since time immemorial (well, Enron’s collapse) the rating agencies have steeled themselves against accusations of bias and mis-rating with a powerful defence: their right, under the first amendment, to express opinions and - as journalists - to do so under the freedom of the press.

“Ratings”, a general counsel for Fitch once told a congressional committee, are “the world’s shortest editorials”.

Abrams, says Gawker, is “one of the nation’s premier defenders of the First Amendment” and he is now representing S&P in the myriad cases the rating agency has had brought against it by investors who lost millions - if not billions (and indeed, in aggregate, trillions) - from the failure of the agency’s debt ratings.

Naturally he’s been engaged with the brief to protect the rating agency’s rights under the first amendment. Here he is speaking to NPR (the transcript is worth reading in full):

I believe all sorts of entities deserve first amendment rights. Even though they’re unpopular, rating agencies express opinions, and as such they should be as entitled to First Amendment protections as other people. It’s not a bad thing, it’s not an ignoble thing, and yes-I think it ought to be protected.

The question is whether the rating agencies deserve their status as straight-forward reporters of opinion, or whether, in fact, they are something more. Hitherto, legal challenges to the rating agencies have hinged around proving one key thing: whether the agencies can be counted as sub-underwriters or not. If they are, then they have a fiduciary duty to investors who have depended upon their opinions.

The first amendment defence is actually shakier than it looks. So far, it has only been upheld in the lower US courts. A full fight over the legal status of the rating agencies has not yet been had out.

The issue has long been debated. Intelligent people have come down on both sides. But this time there is a new arrow in the quiver for those seeking to challenge the raters. Whereas before the agencies were challenged for getting it wrong over Enron, or else, more recently, for being biased in their assessment of municipal bond issues, the real issue is with structured finance.

Attorney David Grais, who is debating the rating agencies with Abrams on NPR, puts forward the following analogy:

…in the arena of structured finance, it’s as though the rating agencies are in the kitchen helping to cook the meal. And then when the meal comes out, they sit down, eat the meal and then write a rating of it, or a review of the meal. That’s when, in my opinion, they lose the protection of the First Amendment.

In fact, we’d go further. The agencies didn’t just help cook the meal, they wrote the recipes.

Related links:
Rating cows
- FT Alphaville
Exclusive: Moody’s error gave top ratings to debt products
- FT Alphaville


Don the libertarian Democrat Jun 3 23:16
"rating agencies express opinions"

I'm expressing my opinion in this post. Ratings Agencies are grading a product. It's the difference between movie reviews and grading beef. If Standard and Poor's, what an appropriate name, are merely the Siskel ( Alav Ha-Shalom ) & Ebert of credit, they would be providing entertainment, and nothing more.

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