This turn of events is long overdue.
For those who are not aware, one gigantic reason that so many people bought the real-estate backed securities was because they received top ratings from the top rating agencies, Moody and Standard and Poor. These rating agencies are the ones that rated the securities as not at all risky.
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NEW YORK (AP) -- Connecticut's attorney general sued Moody's Investors Service and Standard & Poor's over ratings the agencies issued on risky investments.
In the civil lawsuit filed Wednesday, Attorney General Richard Blumenthal alleged Moody's and S&P knowingly assigned false ratings to complex investments that pushed the country into recession.
The suit, which Blumenthal called the first of its kind against ratings agencies, is being brought under Connecticut's unfair trade practices law. The attorney general is seeking penalties and fines that could reach into the hundreds of millions of dollars, he said
A huge reason for the problem is the fact that companies such as AIG and the now defunct Lehman Brothers pay for these rating agencies to grade their securities. They all sit in a room together, and the bank or the other corporation tries to convince the rating agency to give the security a high rating. The rating agency wants to give a good rating, because they'll be asked back to grade the next security - and that's how they make their money.
It's hard to see exactly how this procedure can be made squeaky clean - the face-to-face meetings can be useful in clearing up genuine misunderstandings - but I do think that investors would be served better if the companies were not permitted to choose which rating agency grades their next security issue. Instead, they should pay into a general fund, and then the government could assign the rating agency which grades them. Of course, if the company still wanted a second opinion, they could pay for that directly too.
In the meantime, this Connecticut development is long overdue. The rating agencies really let us down. Perhaps we should rename Moody's Doomy and Standard & Poors, Poor Standards...