Ohio Sues Rating Firms for Losses in Funds: Fraud Catching Up with Swindlers

Posted on November 21, 2009 by LivingLies dot WordPress dot com
last thing you want to hear is how complex this scheme was. But if you
can get over the intimidation factor, you will see how the lawsuits
filed by individual homeowners, attorney generals, and class actions
are picking apart the whole scheme, coming up with the inconvenient
answers that Wall Street is working to avoid and that many government
officials are too lazy or paid off or whatever to get involved.

So here we focus on the rating agencies and you might be asking why do I
care if I wasn’t an investor who bought those empty bonds that funded
my loan? The reason is that others with far greater resources than you
are doing your work for you.

The SINGLE transaction, starting with the sale of the bond to the investor
and then to the sale of the financial loan product to the homeowner and
then ending with the false foreclosures and unconscionable proceeds of
credit default swaps could ONLY have been achieved with the active
participation from the rating agencies.

By selling their reputation for objectivity to the highest bidder, by
misusing their skill in assessing credit risk,  the rating agencies
enabled those bonds to be sold under the pretense that they were AAA
sound investments. But for that the mortgage meltdown would never have
occurred. But for that, you would not be in the upside down position,
or delinquency, default or foreclosure in which you find yourself.

But for the free flow of free money there would have been no pressure to
get rid of it in order to make Wall Street’s unconscionable profits. And
without that pressure, housing prices would have remained relatively
stable instead of shooting up to unprecedented (by any measure)
unsustainable levels that were not reflective of what the homeowner
would get when Wall Street’s scheme was over.

Your home loan was rated by these rating agencies. They looked the other way
and changed underwriting standards from common sense to common fraud.
The ONLY way the bonds sold to investors could have been rated so high
was by rating the underlying mortgages and notes. No REAL analysis
would have done anything except raise red flags bringing the rating
down to junk. Just starting with the “appraisal” on the house which was
also a form of rating, no reasonable person could possible look at the
history of housing prices and believe that the 30% jump in 4 months was
sustainable. Nobody using their own money would fund a deal based on
that. It is only because the originating “lenders” (i.e, straw-men,
conduits) were not using their own capital that these loans were made.

We were all duped by the appraisers and the rating agencies who sold their
integrity to the highest bidder. And in the process of tragedy of
astonishing severity is unfolding, getting worse and fooling the
American public — until it reaches each and every one of us, which it

At some point the homeowners should be suing the rating agencies and
appraisers for their part in all this. The counterclaim is both fraud
in the inducement and fraud in the execution. Fraud in the execution
because you thought you were just taking out a loan when in fact you
were purchasing a financial loan product that was a security promising
you passive returns whose value was intentionally misrepresented. Fraud
in the inducement because had you known the true value of the property
you would never have assumed that you could cover the loan terms, which
were also illegal and predatory.

The game is on. If you reach the truth before Goldman et al are done, you
can stop it, reverse it, and set the country back on the path of
confidence in an economy that is based upon something other than $500
trillion in derivative vapor.
November 21, 2009

Ohio Sues Rating Firms for Losses in Funds

Already facing a spate of private lawsuits, the legal troubles of
the country’s largest credit rating agencies deepened on Friday when
the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch,
claiming that they had cost state retirement and pension funds some
$457 million by approving high-risk Wall Street securities that went
bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s,
Standard & Poor’s and Fitch were in league with the banks and other
issuers, helping to create an assortment of exotic financial
instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees,
departed from their objective, neutral role as arbiters,” the attorney
general, Richard Cordray, said at a news conference. “At minimum, they
were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

“A recent Securities and Exchange Commission
examination of our business practices found no evidence that decisions
about rating methodologies or models were based on attracting market
share,” he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims.
“It is unfortunate that the state attorney general, rather than
engaging in an objective review and constructive dialogue regarding
credit ratings, instead appears to be seeking new scapegoats for
investment losses incurred during an unprecedented global market
disruption,” he said.

A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three
largest credit rating agencies, which together command an 85 percent
share of the market. Since the credit crisis
began last year, dozens of investors have sought to recover billions of
dollars from worthless or nearly worthless bonds on which the rating
agencies had conferred their highest grades.

One of those groups is largest pension fund in the country, the California Public Employees Retirement System,
which filed a lawsuit in state court in California in July, claiming
that “wildly inaccurate ratings” had led to roughly $1 billion in

And more litigation is likely. As part of a broader financial
reform, Congress is considering provisions that make it easier for
plaintiffs to sue rating agencies. And the Ohio attorney general’s
action raises the possibility of similar filings from other states.
California’s attorney general, Jerry Brown,
said in September that his office was investigating the rating
agencies, with an eye toward determining “how these agencies could get
it so wrong and whether they violated California law in the process.”

As a group, the attorneys general have proved formidable opponents,
most notably in the landmark litigation and multibillion-dollar
settlement against tobacco makers in 1998.

To date, however, the rating agencies are undefeated in court, and
aside from one modest settlement in a case 10 years ago, no one has
forced them to hand over any money. Moody’s, S.& P. and Fitch have
successfully argued that their ratings are essentially opinions about
the future, and therefore subject to First Amendment protections
identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went
bad in the financial crisis that started last year, and before Congress
extracted a number of internal e-mail messages from the companies,
suggesting that employees were aware they were giving their blessing to
bonds that were all but doomed. In one of those messages, an S.& P.
analyst said that a deal “could be structured by cows and we’d rate it.”

Recent cases, like the suit filed Friday, are founded on the premise
that the companies were aware that investments they said were sturdy
were dangerously unsafe. And if analysts knew that they were
overstating the quality of the products they rated, and did so because
it was a path to profits, the ratings could forfeit First Amendment
protections, legal experts say.

“If they hold themselves out to the marketplace as objective when in
fact they are influenced by the fees they are receiving, then they are
perpetrating a falsehood on the marketplace,” said Rodney A. Smolla,
dean of the Washington and Lee University School of Law. “The First
Amendment doesn’t extend to the deliberate manipulation of financial

The 73-page complaint, filed on behalf of Ohio Police and Fire
Pension Fund, the Ohio Public Employees Retirement System and other
groups, claims that in recent years the rating agencies abandoned their
role as impartial referees as they began binging on fees from deals
involving mortgage-backed securities.

At the root of the problem, according to the complaint, is the
business model of rating agencies, which are paid by the issuers of the
securities they are paid to appraise. The lawsuit, and many critics of
the companies, have described that arrangement as a glaring conflict of

“Given that the rating agencies did not receive their full fees for
a deal unless the deal was completed and the requested rating was
provided,” the attorney general’s suit maintains, “they had an acute
financial incentive to relax their stated standards of ‘integrity’ and
‘objectivity’ to placate their clients.”

To complicate problems in the system of incentives, the lawsuit
states, the methodologies used by the rating agencies were outdated and
flawed. By the time those flaws were obvious, nearly half a billion
dollars in pension and retirement funds had evaporated in Ohio,
revealing the bonds to be “high-risk securities that both issuers and
rating agencies knew to be little more than a house of cards,” the
complaint states.

Filed under: CDO, CORRUPTION, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure, securities fraud | Tagged: , , , , , , , , , , , , , , , , , , ,


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