Market Volatility Leaves Room for Risky Practices
August 17, 2011
Thomas A. Dubbs
Standard & Poor's recent downgrade of the United States' credit rating from AAA to AA+ has prompted an increased volatility in the markets, and inspired fears that a second worldwide financial crisis may be upon us. Pension plans in both the United States and Europe, many of which were already facing long-term funding shortfalls, must now deal with additional challenges in this destabilized environment.
The major credit rating agencies, including Standard & Poor's, have received heavy criticism in recent years. During the buildup to the 2007 credit crisis, they frequently awarded high ratings to complex investments based on risky subprime mortgages. These undeservedly good ratings helped support the housing bubble and led investors to unwittingly gamble on what amounted to junk bonds (or worse). Inevitably, the value of these investments plummeted. In response, a number of lawsuits were filed in 2009 in the United States against Standard & Poor's and the other credit rating companies, including federal actions in Ohio (by the Ohio Attorney General) and in New York, and state actions in Connecticut (by the Connecticut Attorney General) and in California by the California Public Employees Retirement System ("CalPERS"). In all four cases, the parties are awaiting decisions by the courts.
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