one thing that has puzzled me is the role of the rating agencies that gave good ratings to the various CDO that have tanked so spectacularly.
have any investors brought any law suits against any of the credit rating agencies?
Doubtful. Unless they committed outright fraud or collusion, which does not appear to be the case, they probably can’t be held liable.
It would be like suing Consumer Reports for publishing a good review of a shitty vacuum cleaner.
I think the real problem in suing them is that the ratings were not wrong, taken individually. Since bad securitized mortgages were backed by insurance to make them look good, they could be given a good rating under the rules. The problem is the aggregate risk that housing values would decline even as oil spiked and the whole economy slowed. Under a condition like that, massive write offs of individually good bonds would “poison” the banks’ assets and overwhelm the insurers.
what about the tort of negligent misrepresentation? do you have that in the US?
It might be actionable in British tort law – the leading case is Hedley Byrne Co. Ltd v. Heller & Partners Ltd. See Hedley Byrne v. Heller in Wikipedia. Whether that case would be persuasive in an American court is another matter, of course.
AAre you saying that the real problem is not that bad mortgages were falsely sold as good mortgages, but that the insurance companies were unable to pay up when the mortgages went bad?
Yes. AIG backed a good number of the derivatives, based on their own (mistaken) assumption that the housing market would continue to go up (or at least not tank). Problem is, the percentage of the loans which AIG had to have cash on hand to cover was based on their rating; at AAA, it was 25% (or whatever). At C, it might be 75%.
Once people started opening up the securitized loan packages and seeing what kind of crap was inside them, the ratings obviously dropped pretty quickly; that meant AIG’s on-hand cash reserves had to increase to match. Unsurprisingly, it turned out that AIG was just not that liquid.
ETA: That’s not “the real problem”, exactly, but if AIG had done their own due diligence, none (or at least, less) of this would have happened.
And we can’t sue AIG because they’ve already gone out of business.
No! Wait!, I misremembered. Thery’re not out of business yet. But they’re adequately broke that suing them will be useless…
Yes. However, the question is whether the rating agencies should reasonably have known that they were making false statements.
In any case, Moody’s and the other rating agencies did an equally spectacularly poor job with the Enron fiasco (by failure to downgrade Enron’s corporate bonds even when it was clear that the company was soon going to be in no position to honor them) and no liability appears to have attached there. All that happened was the International Organization of Securities Commissions issued a mealy-mouthed Code of Conduct for the rating agencies, and everyone pronounced the problem solved.
Well, that and we’d just have to give them more taxpayer money to cover the judgments.
The problem with filing a suit in this scenario is that if I sue, say, Lehman Brothers (or whoever now holds their assets), everybody else who had a little money in the markets will, and Lehman’s ownership will sue the CRAs, who will sue AIG, who will countersue the CRAs, and pretty soon you’d end up with Everybody v. Everybody Else, and after attorney’s fees, court costs and so on there won’t be any money left for the winners.
That is, even assuming anyone with standing is still alive to collect after the appeals and subrogation process.
Jarndyce v. Jarndyce: this time it’s personal!