New revelations in the investor lawsuit against Moody's and Standard & Poor's underscore the crucial role the ratings agencies played in fueling the recent financial crisis. As set out in
Gretchen Morgenson's July 3
New York Times piece, plaintiffs in the suit scored a landmark victory in persuading Judge Shira Sheindlin of the Southern District of New York to reject the agencies' argument that the catastrophically inflated ratings they gave to certain risky investment vehicles should be subject to First Amendment protections. Plaintiffs in the case had offered ample evidence that the ratings were far from independent opinions, identifying specific instances when S&P raised ratings on investment vehicles sponsored by valued customer Morgan Stanley in response to complaints from the investment bank that ratings were too low.
While the Dodd Frank Wall Street Reform and Consumer Protection Act offered helpful solutions for other problems contributing to the financial crisis, it did little to prevent the conflicts of interest that resulted in risky securities being given sterling ratings by compliant rating agencies. More troublingly, proposed rules implementing Dodd Frank that would at least improve internal controls and oversight of the agencies have become hopelessly bogged down in the rulemaking process: nearly two years after Dodd Frank's passage these and other key investor protection regulations have yet to be finalized. With elections looming in November, investors may have to wait until the winter to see final rules issued.