Judge Says Ratings Agencies Are Not Necessarily Protected By Free Speech

from the that-seems-bad dept

The big ratings agencies, Moody's and S&P have taken something of a beating for their role in the financial crisis -- often rating pure junk as if it were pure gold. But, of course, in the rush to find someone to blame legally, it made little sense to go after the ratings agencies. The real problem wasn't that the ratings sucked (they did), but that federal regulations gave those ratings power in the law. This made those ratings not only more important, but gave them an official "stamp of approval" such that people assumed (incorrectly, obviously) that they must be accurate. The idea that a small group of guys sitting in an office could more accurately rate the risk of debt over the actual market seems rather absurd -- and yet, we gave it the federal stamp of approval. Still, as bad as the ratings were, there shouldn't be any legal consequence for getting the ratings wrong. After all, unless there was evidence of outright fraud, the ratings are simply opinions, which are protected by the First Amendment... or so we thought.

In a ruling last week, a judge has noted that ratings agencies' ratings are not protected free speech if they're only disseminated to a small group of people, rather than the wider public. While the ruling cites a few earlier cases, I have to admit that I have trouble understanding this reasoning. I don't recall anything in the First Amendment that says the government can restrict freedom of expression if it's to a small group of people, but not if it's to a large group of people. This probably isn't a huge deal for the ratings agencies -- though, it will keep them busy with some lawsuits that may cost them some money. The bigger "problem" in the market came from relying on their public ratings -- and those should (still) be protected.
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Filed Under: free speech, ratings agencies, wall street
Companies: moody's, s&p


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  1. identicon
    DCX2, 8 Sep 2009 @ 8:58pm

    Allow me to fill in the blanks...

    Okay, so, Morgan Stanley, Moody's, and S&P all get together and iteratively refined a package until it gets a certain rating. Moody's and S&P are paid handsomely by Morgan Stanley (3x normal fees + ongoing fees), but only if the SIV in question got the requested ratings... (see page 11 of the judge's opinion)

    The thing tanks. The senior debt, the best of what was in the package, is worthless. The investors smell something fishy...certainly the ratings agencies knew it was made up of crap.

    Sure, the rating agencies are just giving o.p.i.n.i.o.n.s... Don't mind the fact that their privileged federal status makes their opinions very valuable, they're still just opinions. (something about...having your cake and eating it too?)

    So maybe you're a stickler for details. Well, then you might start with the judge's citation for previous litigation where the credit rating agencies' "opinions" weren't protected free speech. Stare decisis, and all that.

    Oh, and there's some jazz about "actual malice" and "actionable opinions" and how they can only get in trouble if they provided opinions in bad faith. I wonder if that has anything to do with one of the headings on page 38 of the opinion, "Knowledge of the Falsity".

    http://online.wsj.com/public/resources/documents/ratings.pdf

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