Several years back the credit rating agencies became virtually immune from lawsuits as they cleverly maintained—and the courts agreed—they were merely expressing their First Amendment “opinion” on the bona fides of a bond offering. Think consumer reports rating power drills or your local newspaper film critic telling you Caddyshack 2 is better than the original. Forget that billions were invested in the bonds they rated or the huge fees they received from issuers. They could only be successfully sued—like a magazine or newspaper—if you could establish “reckless disregard for the truth.”
Is a mistake of $2 trillion reckless enough? Yes, trillion with a “t”. That’s the amount that S&P was off in its basic budget calculation. Shortly after being advised on Sunday of the mistake by administration officials, they went ahead anyway with their “opinion” to downgrade US debt for the first time in history. That decision was merely emblematic of a string of “reckless” conduct. These are the same guys who fueled the subprime mortgage crisis by not flinching from an “opinion” that mortgage-backed securities—often backed by mortgages with no documents—were investment-grade. AAA-rated. Or Lehman Brothers bonds, which remained A-rated on the verge of bankruptcy as its business rapidly became exposed as a house of cards.
To be sure, Sleazy & Poor Judgment’s “opinions” on the vitality of corporate and government debt offerings have been… well… downgraded by the market. And there is no doubt a crisis in Washington regarding issues of spending and debt, irrespective of the actions of S&P. But regrettably an S&P opinion still holds sway. In the short term it will wreak havoc on the stock and bond markets; yesterday the Dow Jones plunged over 630 points, the worst drop since 2008. Over time it will fester and linger, well into and through November when both parties try to blame the other for this “black eye” to the pride of America.
Back to the lawsuit. S&P should be called to answer for its decision to go full-steam ahead toward the downgrade even though their supporting calculations were $2 trillion off. A lawsuit cannot solve the financial mess we are in, but it can sideline a voice that has done a disservice to the American People.