In a recent post, I highlighted how the US Department of Justice is suing ratings agency S&P concerning their suspicious ratings practices that essentially fueled the financial crisis. In the same post, I also wrote about how I believe ratings agencies S&P and Moody’s also artificially inflated the 38 Studios bond ratings as investment grade.
Although not impossible, it is difficult for taxpayers to file lawsuits due to what is known as the standing law doctrine. It is therefore the obligation of attorneys general to defend taxpayers when they have been wronged.
Colorado became a recent addition to a list of attorneys general (both Democrats and Republicans) from Arizona, Arkansas, California, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, Washington, and Connecticut that have joined the DOJ in alleging that the ratings agencies violated their respective Unfair Trade Practices Acts:
Colorado Attorney General John Suthers filed a lawsuit ….. against Standard and Poor’s (S&P) in connection with the ratings that it issued on structured finance securities, including residential mortgage backed securities (RMBS) that were issued at the height of the market from 2004-2007. This lawsuit is part of a joint federal-state effort to hold those responsible for their part in the foreclosure and financial crisis. The congressionally-appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis “could not have happened” without ratings agencies such as S&P. Colorado’s lawsuit alleges that S&P put its financial interests above its self-described objectivity and independence.
Connecticut began the process in 2010 (you can read the filing here) and has been urging other states to join them in taking on the ratings agencies:
Inflated ratings of mortgage securities are considered a key cause of the 2008 financial crisis. Critics accused the ratings firms of lowering standards to win business and misleading bond investors to buy debt they thought was safe but turned out to be toxic .
It would seem that the ratings agencies were up to a similar ratings scam with regard to the 38 Studios bonds.
Attorney General Kilmartin was the Majority Whip in the State House of Representatives at the time of the 38 Studios deal, so he might have to recuse himself from such a case, (correction: Kilmartin resigned as Whip in February 2010, prior to the 38 Studios vote) but taking no action on such an important matter would be a huge disservice to the citizens of Rhode Island.
Will Attorney General Peter Kilmartin stand up to the ratings agencies and fight for the taxpayers of Rhode Island? Dawson Hodgson, the Republican challenging him, has already staked out a strong position on 38 Studios – which promises to define the election this year up and down the ballot. Why hasn’t RI joined the other states and federal government in taking on the ratings agencies for their role in the financial crisis? Will the AG’s office sue S&P and Moody’s for artificially rating the 38 Studios bonds as investment grade?