Finally a large financial entity, Calpers, the California Public Employees Retirement System, worth an estimated $173 billion, has sued those responsible for rating the Toxic Assets that are now decimating our national and global economy.

The three primary rating agencies; Moodys, Standard and Poors, and Fitch made “negligent misrepresentations” to the pension fund. The agencies’ ratings “proved to be wildly inaccurate and unreasonably high.” Calpers goes on to say that the methods used to assess these securities were “seriously flawed in conception and incompetently applied”.

It has been my contention all along that this group is by far the most culpable in this affair, because they took perfectly lousy financial instruments and slapped triple A ratings on them; the equivalent of United States Bonds. These complicated instruments that only the most sophisticated financial engineers could understand, were pushed onto countries, cities, municipalities and large pension funds as the greatest and safest investment since the United States Savings Bond, yet they were the farthest thing from safe. Most of these instruments have now lost ALL of their intrinsic value.

It wasn’t until the three credit agencies set their stamp of approval on these incredibly risky investments that the mortgage backed securities boom on Wall Street exploded. Wall Street entrepreneurs sold their new product to anyone looking for a larger annual return.

After they were sold, the inflow of money (billions or more likely trillions of dollars) was then funneled back to mortgage lenders like Countrywide and New Century Mortgage, who were busy underwriting these risky high yield, subprime loans; the key element within the financial instruments that the giants on Wall Street were so successfully selling. In other words, the securities were selling like hot cakes and Wall Street couldn’t get enough mortgages to back them, and so they pushed their lending partners to create more loans no matter how risky. Why….because they already had them sold to China, Calpers, cities in Norway, etc….. and why were they so easy to sell….. because Moodys, and Fitch, and Standard and Poors were slapping triple A ratings on them…. the highest rating possible.

It makes one wonder why Calpers, who has probably some of the most sophisticated financial experts in the industry, could not detect the risk in these securities? The reason was because of their opaqueness.

The information about what was inside of them was kept hidden from the buyer under the guise that “the securities in these packages were considered proprietary and unavailable for review”. Hence the triple A rating was the key measuring gauge the investor had, to determine the risk in the product that they were buying.

Furthermore, Calpers contends in their suit that the rating agencies were not only responsible for inaccurately rating these financial securities, but that there was an “inherent conflict of interest”, since they were actually paid by the companies issuing the securities.

Finally, the insidious behavior of these institutions reached a new ethical low when Calpers revealed in their lawsuit that the agencies themselves actually assisted, for a hefty fee, those who were creating these securities, so that they would produce a product that would receive the prestigious triple A rating.

No wonder Calpers decided to sue the rating agencies. My only question is what took them so long?

Furthermore, why hasn’t a criminal investigation been initiated? There are people and corporations out there that are undeniably responsible for our financial mess, and in my opinion, should be held accountable. After all, as financial agents they have a fiduciary responsibility to the public, and by issuing triple A ratings on these securities they not only abandoned their responsibility, but assisted in the meltdown of our global economy.

In this time of re-regulating the banking industry, and trying to create laws that would prevent a similar situation, if we do not address this conflict of interest, between Wall Street and the agencies that rate their financial instruments, we are certain to repeat the mistakes that led us into this current financial crisis.

*primary source The New York Times July 2009

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