Tuesday, January 26, 2010

Livestock-raters get their lawsuit dismissed! (MHP, MCO)

Awww, good for them. Bloomberg is reporting that S&P and Moody's have won dismissal of a lawsuit:

"Standard & Poor’s and Moody’s Corp. won dismissal of a lawsuit seeking to hold them responsible for defrauding investors who bought about $100 billion of mortgage- backed securities.
At a hearing today, U.S. District Judge Lewis Kaplan in New York said he would dismiss claims against the rating companies, according to a clerk for the judge.Lehman Brothers Holdings Inc., which was alleged to have once owned the bonds that were sold, is bankrupt and not a defendant in the case.
“We are pleased the judge granted our motion,” Chris Atkins, a spokesman for S&P, a unit of McGraw-Hill Cos., said in an interview. Michael Adler, a spokesman for New York-based Moody’s, didn’t immediately return a call.
Investors in the mortgage-backed securities claimed in their lawsuit that S&P and Moody’s misled them by disregarding ratings guidelines, serving conflicting roles in evaluating and structuring the bonds, and sacrificing their independence."

Why do I call them "livestock-raters?" Because they said so themselves. From a text conversation between two S&P officials:
S&P Official #1: Btw (by the way) that deal is ridiculous.
S&P Official #2: I know right...model def (definitely) does not capture half the risk.
S&P Official #1: We should not be rating it.
S&P Official #2: We rate every deal.
It could be structured by cows and we would rate it.


A good description of the ratings business is described by David Einhorn, who is (or was in May09) short MCO:
"If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have a problem...The truth is that nobody I know buys or uses Moody's credit ratings because they believe in the brand. They use it because it is part of a government created oligopoly and, often, because they are required to by law...The real value of Moody's lies in its ability to cow the authorities into preserving its status."

(note to regular AlphaNinja readers - NO, I will not soon tire of posting this pic!)

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