CalPERS Goes After The Rating Agencies (Moody's, S&P, Fitch)

CalPERS, the nation’s largest public pension fund, has filed suit in California state court in connection with $1 billion in losses that it says were caused by "wildly inaccurate" credit ratings from the three leading ratings agencies.

Calpers suit is the latest in series of negative comments regarding the rating agengies role in providing positive reports about risky securities issued during the subprime boom that have lost nearly all of their value.

The lawsuit is focused on structured investment vehicles (SIV), highly complex packages of securities made up of a variety of assets, including subprime mortgages. Calpers bought $1.3 billion of them in 2006; they collapsed in 2007 and 2008.

Calpers argues that in giving these packages of securities the agencies’ highest credit rating, the three top ratings agencies — Moody’s (NYSE: MCO), Standard & Poor’s and Fitch — "made negligent misrepresentation” to the pension fund, according to the WSJ.

The AAA ratings given by the agencies "proved to be wildly inaccurate and unreasonably high," according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities "were seriously flawed in conception and incompetently applied."

Credit agencies would receive fees that ranged from $300,000 to $500,000 and up to $1 million for helping to structure and package each deal. These fees were on top of the revenue generated by the agencies for their more traditional work of issuing credit ratings, which in the case of complex securities like structured investment vehicles generated higher fees than for rating simpler securities.

"The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible," according to the Calpers suit.

The suit also contends that the ratings agencies continued to publicly promote SIVs even while starting to downgrade them. Only days after Moody’s downgraded some securitized packages in 2007, it published a report titled "Structured Investment Vehicles: An Oasis of Calm in the Subprime Maelstrom."

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