Finally, a large financial entity, Calpers, the California Public Employees Retirement System, worth an estimated $173 billion, has sued those responsible for rating the Toxic Assets that are now decimating our national and global economy. The three main rating agencies; Moody’s, Standard and Poors and Fitch made “negligent misrepresentations” to the pension fund. The ratings from the agencies “proved to be wildly inaccurate and unreasonably high”. Calpers goes on to say that the methods used to assess these values ​​were “severely flawed in conception and incompetently applied.”

I have always maintained that this group is by far the most guilty in this matter, because they took perfectly lousy financial instruments and gave them triple-A ratings; the equivalent of US bonds. These complicated instruments that only the most sophisticated financial engineers could understand, were introduced to countries, cities, municipalities and large pension funds as the largest and safest investment since the United States Savings Bond, but they were the furthest from the security. Most of these instruments have now lost ALL of their intrinsic value.

It wasn’t until all three credit bureaus put their stamp of approval on these incredibly risky investments that the Wall Street mortgage-backed securities boom exploded. Wall Street entrepreneurs sold their new product to anyone looking for a higher annual return.

After they were sold, the inflow of money (billions or more likely trillions of dollars) was funneled back to mortgage lenders like Countrywide and New Century Mortgage, who were busy underwriting these risky high-yield subprime loans; the key element within the financial instruments that the giants of Wall Street sold with such success. In other words, the securities were selling like hotcakes and Wall Street couldn’t get enough mortgages to back them, so they pressured their lending partners to create more loans no matter how risky. Why…because they already had them sold to China, Calpers, Norwegian cities, etc…and why were they so easy to sell…because Moodys, and Fitch, and Standard and Poors were giving them triple ratings A…. the highest rating possible.

One wonders why Calpers, which probably has some of the most sophisticated financial experts in the industry, failed to spot the risk in these securities. The reason was because of the opacity of it. Information about what was inside them was kept hidden from the buyer on the pretext that “the values ​​in these packages were considered proprietary and were not available for review.” Therefore, the triple A rating was the key measurement indicator that the investor had to determine the risk in the product that he was buying.

Furthermore, Calpers contends in its lawsuit that the rating agencies were not only responsible for incorrectly rating these financial securities, but that there was an “inherent conflict of interest” since they were actually paid by the companies that issued the securities. Ultimately, the insidious behavior of these institutions reached a new ethical low point when Calpers revealed in its lawsuit that the agencies themselves actually helped, for a hefty fee, those who were creating these securities to produce a product that received the prestigious rating. triple A.

Not surprisingly, Calpers decided to sue the rating agencies. My only question is why did it take so long? Also, why hasn’t a criminal investigation been launched? There are individuals and corporations who are undeniably responsible for our financial mess and, in my opinion, should be held accountable. After all, as financial brokers they have a fiduciary responsibility to the public, and by issuing triple-A ratings on these securities, they not only abandoned their responsibility, they aided in the collapse of our global economy.

At this time of re-regulating the banking industry and trying to create laws to prevent a similar situation, if we do not address this conflict of interest between Wall Street and the agencies that rate its financial instruments, we are sure to repeat the mistakes that led us to this current financial crisis.

*primary source The New York Times July 2009