The First Amendment and The Ratings Agencies

Huffington Post has the first of three pieces on debt ratings agencies and the first amendment interpretation that they’re using to defend themselves in court here.

With help from two of the most storied constitutional lawyers in the country, the raters have successfully argued that when they make a mistake — say, awarding the top triple-A grade to a multibillion-dollar bundle of bonds that later default — they cannot be sued or held accountable.That’s because ratings are opinions, the agencies claim, protected by the constitutional right to free speech.

When banks, corporations or city governments want to raise money, they issue debt in the form of bonds for investors to purchase. The rating companies judge the quality of the bonds. Ratings can range from the highly-coveted triple-A to the “junk” bond status of C or lower

According to the article, investors paid for ratings until the 1970’s, when it was changed to: corporations and banks (issuers) paying for the ratings.  Can you spot the potential conflict of interest?

This is a kind of racket.  Corporations and municipalities cannot sell bonds in the market without a rating from one of these entities.  They are being paid for their opinion, but if the opinion is mistaken, then it’s ‘oh, it’s just my opinion.’  Or worse, if there is fraud or incompetence, it’s still just their opinion and there is no transparency, either.  So, even though the ratings agencies are at the center of the recent meltdown, there is no recourse for their sloppy inaccuracies (upon which everyone must rely).  Simply by shouting ‘First Amendment Rights!’, they can avoid all consequences.  Nice.

Read more at: http://www.huffingtonpost.com/2009/10/28/under-attack-credit-rater_n_337712.html