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Invoking the First Amendment To Avoid Accountability

April 21, 2009

Today’s Wall Street Journal has an amazing story [subscription required] on the defense the major credit rating agencies are offering to the multiple lawsuits charging them with misleading investors about the quality of the mortgage-backed securities that lie at the center of the financial meltdown.

Many investors –pension funds, state and municipal governments, and others – relied on the triple-A ratings offered by the big three credit ratings agencies (Standard & Poor’s, Moody’s Corp. and Fitch Ratings) to conclude that they were making safe investments.  In fact, these securities turned out to be extraordinarily risky and those who bought them suffered catastrophic losses.  

How could the ratings have been so wildly wrong?  It turns out that agencies were paid for their ratings by the Wall Street firms that issued by the securities.

As SEC Commissioner Kathleen Casey explained earlier this year: the companies produced “ratings that pleased the investment banks that arranged these pools of securities, but betrayed the trust of investors…Although many of their ratings turned out to be catastrophically misleading, the large rating agencies enjoyed their most profitable years ever.”

Investors who relied on the ratings are understandably upset, and many have filed lawsuits against the agencies for their corrupt and misleading advice.  The companies have responded by invoking their right of free speech, claiming that the first amendment protects them.  A Reuters story last fall noted the agencies’ claim that “their ratings represent opinions rather than investment advice.”

Connecticut Attorney General Richard Blumenthal, who has filed his own lawsuit against Standard & Poor’s, scoffs at the free speech claim: “It’s much more like an advertisement that misstates the price of an item on sale than a political candidate on a soapbox.”

Without the credit rating agencies’ seal of approval on the mortgage-backed securities, the explosion of predatory mortgage lending in the middle of this decade could never have happened.  Will the courts allow these companies to be held accountable for their role in creating the financial debacle that is costing millions of Americans to lose their homes to foreclosures?

Stay tuned….

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