Editor: David Reiss
Brooklyn Law School

February 8, 2013

More on DoJ’s S&P Complaint

By David Reiss

I highlighted some of the juicy bits of the complaint a few days ago.  There has been a lot of discussion of the suit and related issues.  Here is my two cents’ worth.

  • FIRREA, an untested enforcement statute, has gone from zero to hero in sixty seconds.  The federal government has had very little experience using the enforcement provisions of FIRREA but commentators have now identified it as a powerful tool to hold financial companies accountable for their misdeeds in the early 2000s.  Time will tell if courts agree that this expansive interpretation will hold up.
  • It is probably no coincidence that the federal government brought the S&P case in California, which is in the 9th Circuit.  Or rather, I should say, it is probably no coincidence that the government did NOT bring it in the 2nd Circuit.  The 2nd Circuit has ruled in favor of the rating agencies even since the events of the financial crisis had become well known, continuing the trend of treating rating agencies as editorialists, albeit terse ones.  Even though Judge Scheindlin (SDNY) has issued a series of rulings against rating agencies, the 2nd Circuit will ultimately rule on any appeals from the cases she hears.  While the 9th Circuit is more of a wild card than other Circuits, there is no doubt that it will go its own way on rating agency liability.
  • It is hard to say whether the federal government is primarily seeking to reform the rating agency industry by bringing this lawsuit (I would assume that similar suits are in the works for Moody’s and Fitch) or whether it is merely seeking to hold it accountable for its alleged bad acts.
  • It is interesting to see how the states are piling on, with lawsuits and investigations in a number of states, including NY.  The rating agencies’ potential liability from all of these suits combined is quite significant — indeed, going-out-of-business significant.
  • And it is scary to realize that for all of the documented flaws in the rating agency industry, no one has come up with a model for the industry that is clearly superior to what we have now.  There is a lot of work to be done.
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