The case against Standard and Poor's finally got underway on October 7th in Australia. Thirteen towns were sold AAA-rated Constant Proportion Debt Obligations (CPDO's - also known as "Rembrandts" by the Australian firm Local Government Financial Services in 2006. According to Standard and Poor's, who rated the synthetic derivatives, there was less than a 1% chance of failure. Within two years the products had crashed, resulting in losses of $15 million for the affected councils. Standard and Poor's has been charged on two fronts. Firstly, as the CPDOs were new products, they did not have sufficient information to accurately rate them. Secondly, they are charged with bowing to pressure from the issuing bank, ABN Amro, to issue a favourable rating.
In responses, Standard and Poor's has rehearsed familiar arguments, stating that "rating is an art, not a science", and reminding us of recent US judgments declaring ratings no more than "predictive opinions". See previous posts on the Ohio case here.
These may be revisited, however, as on September 30th a judge sitting in Albuqureque denied rating companies' requests to have claims brought against them dismissed. The case is being brought against all three big ratings agencies (Moody's, Standard and Poor's and Fitch) by Maryland-National Capital Park & Planning Commission Employees’ Retirement and the Midwest Operating Engineers Pension Trust Fund. They are representing investors who lost $5 billion in Thornburg Mortgage Home Loans Inc. mortgage- backed securities which were rated AAA.
Developments will be posted here.