CALPERS vs. Floyd Abrams

Unadulterated Securities? No, Chutzpah

Although the ink on CALPERS' lawsuit against the credit rating agencies is barely dry, already the legal strategies being marshaled by both sides are coming into focus.

In fact, S&P has already telegraphed its strategy by hiring Floyd Abrams, the subject of an interview in today's New York Times. Abrams, the country's foremost First Amendment attorney, is set to argue that S&P and Moody's "Triple-A" ratings on trillions in toxic, securitized debt is protected "free speech."

Yup, that's right: no different than this blog post, or the TV weatherman's prediction of tomorrow's weather.

You'd certainly hope that any truth-loving court eviscerates this argument, using the following logic:

There is little chance that a meteorologist has a financial stake in saying, “It’s going to be sunny.” The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like. And all sorts of financial institutions are required by law to rely on ratings. (For instance, there are plenty of money market funds that can’t buy bonds unless rated triple-A.) That elevates the commercial importance of those ratings, which gives them a different legal status than, say, a weather report.

--David Segal, "A Matter of Opinion"; The New York Times (7/19/09)

As best I can tell, the only thing unadulterated coming out of the rating agencies these days is chutzpah.

Here's my "forecast": S&P's legal arguments don't hold water.