Friday, July 17, 2009

Brain Dump: CalPERS is suing ratings agencies

California’s credit rating, the lowest of all U.S. states, was cut for the second time in as many weeks amid lawmakers’ failure to close a $26 billion deficit that left the most-populous state issuing IOUs to creditors. Moody’s Investors Service said it lowered California’s credit rating two steps to Baa1 from A2 and said it could be reduced further if legislators don’t quickly address the state’s cash problem.
Bloomberg, July 14th, 2009.

CalPERS filed a lawsuit against the three biggest credit-ratings agencies, accusing them of issuing "wildly inaccurate and unreasonably high" ratings on structured investment vehicles that saddled the California pension fund with at least hundreds of millions of dollars in losses.

The suit, filed last week in California Superior Court in San Francisco by the nation's largest public pension fund, ratchets up the unflattering scrutiny of Moody's Corp.'s Moody's Investors Service, the Standard & Poor's unit of McGraw-Hill Cos. and Fimalac SA's Fitch Ratings over their culpability for the financial crisis.

Wall St. Journal, July 17th, 2009.

CalPERS has yet to publish a public statement regarding the lawsuit. The timing, however, is impeccable, and I'm curious what's at stake in this outcome. On one hand, the ratings agencies have a degree of influence on the cost of borrowing money - on the other, CalPERS may have opened the door for legal discovery, a process that typically uncovers all kinds of malfeasant treasures.

I think CalPERS has the upper hand here - the ratings agencies are the ones with something to hide, and PERS has the legal power to uncover it.

What do you think?