Rating Agencies

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</div><div style="background-color: rgb(255, 255, 255);"><a href="https://www.exposedbycmd.org/2022/09/06/esg-companies-bankroll-gop-ags-the-very-officials-retaliating-against-their-climate-goals/" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none;">https://www.exposedbycmd.org/2022/09/06/esg-companies-bankroll-gop-ags-the-very-officials-retaliating-against-their-climate-goals/</a></div><div style="background-color: rgb(255, 255, 255);">
</div><div style="background-color: rgb(255, 255, 255);">alex k</div><div style="background-color: rgb(255, 255, 255);">
</div><div>the Center for Media and Democracy (CMD) investigation has identified more than two dozen major U.S. companies that are publicly committed to environmental, social, and governance (ESG) principles yet have recently donated large amounts of campaign cash to a group of Republican state attorneys general that is hyper-focused on eroding air and water regulations, promoting fossil fuel companies, and using state governments to punish companies that try to limit their climate-related risks by divesting from oil, gas, and coal.Republican attorneys general, along with fellow GOP governors and state financial officers, are weaponizing their public offices to prevent action on climate change. Their latest efforts seek to bar companies that divest from fossil fuels or employ other ESG principles from receiving government contracts.And yet large U.S. companies such as AT&T, Cigna, Citigroup, Lowe’s, Pfizer, T-Mobile, and UPS—all of which publicly promote their commitment to ESG—have recently funded the political prosperity of these Republican AGs.<h2 style="background-color: rgb(255, 255, 255); box-sizing: inherit; line-height: 1.2; margin: 0px 0px 10px; word-spacing: 3.6px;">Contradictory Takes on Climate Change</h2>“Climate change is one of the most pressing global challenges,” the multinational brewing company Anheuser-Busch InBev (AB InBev) acknowledges in its <a href="https://www.ab-inbev.com/assets/pdfs/ABINBEV_ESG%202021_Final.pdf#page=22" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background: 0px 0px; transition: all 500ms ease-in-out 0s;">2021 ESG report</a> for investors. “Our evolved understanding of potential climate-related risks and opportunities across our value chain continues to inform our long-term strategy.”AB InBev has set an ambitious climate goal for 2025, aiming to reduce its carbon emissions by 25% and purchase 100% of its electricity from renewable sources by then. In joining the international <a href="https://www.there100.org/re100-members?items_per_page=All" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background: 0px 0px; transition: all 500ms ease-in-out 0s;">RE100</a> initiative to switch to 100% renewables, the company intends to achieve <a href="https://www.ab-inbev.com/sustainability/climate-action/" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background: 0px 0px; transition: all 500ms ease-in-out 0s;">net zero</a> greenhouse gas emissions by 2040.But the beer giant is one of the largest corporate funders of the <a href="https://www.sourcewatch.org/index.php?title=Republican_Attorneys_General_Association" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background: 0px 0px rgb(255, 153, 0); box-sizing: inherit; transition: all 500ms ease-in-out 0s;">Republican Attorneys General Association</a> (RAGA), a group of powerful state officials that has long attacked environmental regulations in the U.S. Members of RAGA—which receives substantial <a href="https://www.exposedbycmd.org/2019/12/12/gop-state-attorneys-general-fight-environmental-regulations-fossil-fuel-companies-bankroll-campaigns/" data-wpel-link="internal" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">funding</a> from fossil fuel companies to support the reelection campaigns of these AGs—have filed legal challenges against Obama-era air and <a href="https://ago.wv.gov/Documents/2017.06.19%20WOTUS%20Comments.PDF" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">water pollution</a> regulations. Former Oklahoma AG Scott Pruitt is among those who have <a href="https://www.nytimes.com/2014/12/07/us/politics/energy-firms-in-secretive-alliance-with-attorneys-general.html?r=0" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">worked directly with fossil fuel lobbyists</a> to challenge these laws.Numerous other corporations have given large sums to RAGA for this year’s elections while publicly committing to ESG principles and, in many cases, to direct climate action.RAGA recently scored a big win in <a href="https://www.nytimes.com/2022/06/19/climate/supreme-court-climate-epa.html" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">West Virginia v. EPA</a> when the right-wing justices who now dominate the Supreme Court ruled against the agency, <a href="https://www.drilledpodcast.com/supreme-negligence/" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">preventing</a> the Biden administration from regulating greenhouse gas emissions under the Clean Air Act without going back to Congress for explicit authorization.<h2 style="background-color: rgb(255, 255, 255); box-sizing: inherit; line-height: 1.2; margin: 0px 0px 10px; word-spacing: 3.6px;">Retaliating Against “Energy Discrimination” </h2>As the Right gets more extreme in the U.S., climate-denying Republicans have added a new weapon to their arsenal: attacking financial firms that decrease their investments in fossil fuels.GOP attorneys general and financial officers are joining state lawmakers in <a href="https://www.exposedbycmd.org/2021/12/03/alec-launches-attack-on-banks-that-divest-from-fossil-fuels/" data-wpel-link="internal" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background: 0px 0px; transition: all 500ms ease-in-out 0s;">penalizing</a> investment firms that divest from fossil fuel companies. Although they are members of a political party ostensibly committed to a free market, these GOP officials are meddling in corporate decision-making by trying to prevent executives from limiting the enormous financial risk posed by the effects of climate change—likely the biggest economic challenge of the century.As with their outcry about critical race theory supposedly being taught in American schools, GOP politicians are attempting to cast climate action as a culture war issue, branding routine practices such as ESG disclosures to investors and divesting from a waning fossil fuel industry as “woke.”In 2021, Texas enacted a law to root out alleged “energy discrimination,” seeking to prevent investment firms that decrease their stakes in oil, gas, and coal from managing the state’s pension and other funds. After the law passed, the energy task force of the ultra-conservative, corporate-funded <a href="https://www.alecexposed.org/wiki/ALEC_Exposed" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">American Legislative Exchange Council</a> (ALEC) approved a <a href="https://www.exposedbycmd.org/2021/12/03/alec-launches-attack-on-banks-that-divest-from-fossil-fuels/" data-wpel-link="internal" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">model bill</a> with similar language, directing state treasurers or comptrollers to maintain a list of firms that have divested from fossil fuels and to only issue government contracts to businesses with more than 10 employees that verify their allegiance to fossil fuels. In the past year or so, <a href="https://www.reuters.com/legal/legalindustry/challenge-investing-face-state-anti-esg-legislation-2022-08-24/" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">similar legislation</a> has been introduced in at least 15 states and has already passed in four. On Aug. 24, Texas <a href="https://comptroller.texas.gov/about/media-center/news/20220824-texas-comptroller-glenn-hegar-announces-list-of-financial-companies-that-boycott-energy-companies-1661267815099" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">released</a> its first list of firms that allegedly “boycott energy companies,” including BlackRock, Credit Suisse, and UBS.<h2 style="background-color: rgb(255, 255, 255); box-sizing: inherit; line-height: 1.2; margin: 0px 0px 10px; word-spacing: 3.6px;">Dubious Claims</h2>On Aug. 4, 19 GOP attorneys general sent a <a href="https://www.texasattorneygeneral.gov/sites/default/files/images/executive-management/BlackRock%20Letter.pdf" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">letter</a> to BlackRock CEO Larry Fink accusing his firm of making ESG investments that “force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.”Claims like this are histrionic and often baseless. For example, BlackRock has invested more than <a href="https://newrepublic.com/article/167550/desantis-anti-esg-movement" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">$108 billion</a> in Texas-based energy companies, and this year it plans to support proportionally <a href="https://www.blackrock.com/corporate/literature/publication/commentary-bis-approach-shareholder-proposals.pdf" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">fewer ESG shareholder resolutions</a> than it did last year. And while Texas Attorney General Ken Paxton (R) and his allies from other states claim that ESG investing hurts their pension funds, academic studies like a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4123366" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">recent one</a> undertaken by researchers at the University of Pennsylvania and the Federal Reserve Bank of Chicago refute this. In fact, since Texas passed its anti-ESG law last year, the UPenn/Fed study indicates that it has already cost the state between $303 and $532 million, as Kate Aronoff <a href="https://newrepublic.com/article/167550/desantis-anti-esg-movement" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">points out</a> in The New Republic.Other evaluations of ESG investing are mixed, but when researchers from the New York University Stern Center for Sustainable Business and Rockefeller Asset Management analyzed over 1,000 relevant research papers from 2015–20, they found that a majority of the studies indicated ESG investing leads to either neutral or improved financial performance. The <a href="https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">meta-analysis</a> points out that “improved financial performance due to ESG becomes more marked over longer time horizons.”Despite these findings, Republican state AGs and other officials have accelerated their attacks on climate action—a central tenet of ESG investing—in the past few years.In August, Florida’s Gov. Ron DeSantis (R) and the trustees of the State Board of Administration voted to <a href="https://www.ai-cio.com/news/desantis-and-allies-bar-florida-sba-from-esg-investing/" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; transition: all 500ms ease-in-out 0s;">ban its investment managers</a> from using ESG considerations in managing its portfolio of roughly $245 billion, primarily from the Florida Retirement System Pension Plan. Florida’s AG Ashley Moody (R) joined the governor in supporting the move. In May, Kentucky’s AG Daniel Cameron (R) issued an <a href="https://ag.ky.gov/Resources/Opinions/Opinions/OAG%2022-05.pdf" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; transition: all 500ms ease-in-out 0s;">opinion</a> barring investment managers doing government business from employing ESG principles. On Sept. 1, Indiana’s AG Todd Rokita (R) <a href="https://www.indianaenvironmentalreporter.org/posts/rokita-environmental-factors-in-public-retirement-funds-promote-leftist-agenda" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; transition: all 500ms ease-in-out 0s;">did the same</a>.Meanwhile, right-wing entrepreneur Vivek Ramaswamy is cashing in on the GOP’s anti-ESG and anti-woke craze, as CMD <a href="https://www.exposedbycmd.org/2022/08/01/financial-firm-cashes-in-on-the-anti-woke-crusade/" data-wpel-link="internal" style="background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">recently reported</a>. His firm Strive Asset Management (DRLL) is trying to pull business away from the Big Three asset managers in red states. It recently announced that it has <a href="https://www.bloomberg.com/news/articles/2022-08-24/anti-esg-firm-plans-new-etfs-after-first-fund-draws-250-million" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">raised $250 million</a> thanks to large investments from far-right tech mogul <a href="https://www.sourcewatch.org/index.php?title=Peter_A.Thiel" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">Peter Thiel</a> and his affiliated groups.Not only are GOP AGs targeting asset managers that reduce fossil fuel investments, but they’re going after regulators and ratings agencies as well.In June, Paxton spearheaded a <a href="https://www.texasattorneygeneral.gov/sites/default/files/global/Texas%20Comment%20Letter%20re%20SEC%20Proposed%20Rules%20(Final%206.17.2022).pdf" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">letter</a> from a group of 12 Republican AGs to the Securities and Exchange Commission (SEC) opposing its proposed corporate disclosure requirements around sustainability. The rule would require firms to back up their claims of purportedly green or socially aware investments. Twenty-one GOP AGs sent another <a href="https://ago.wv.gov/Documents/2022.08.16%20ESG%20Funds%20Comment.pdf" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">letter</a> of opposition to the SEC on Aug. 16.“The woke left is going full throttle in their mission to change every facet of American life… and erode our democratic institutions to suit their liberal agenda,” <a href="https://www.eenews.net/articles/red-states-decry-woke-left-sec-proposal-for-esg-investing/" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">said</a> West Virginia’s AG Patrick Morrisey (R).In late July, Missouri’s AG Eric Schmitt (R) <a href="https://www.reuters.com/business/sustainable-business/exclusive-missouri-attorney-general-investigates-morningstar-over-esg-ratings-2022-08-03/" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="background: 0px 0px rgb(255, 255, 102); text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">launched an investigation</a> into whether Morningstar, a financial research and rating company, violated a state consumer-protection law by evaluating ESG issues. A few weeks later, <a href="https://ago.mo.gov/home/news/2022/08/17/18-state-ags-join-missouri-s-investigation-into-esg-ratings-company-morningstar-and-its-subsidiary-sustainalytics" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="background: 0px 0px rgb(255, 255, 102); text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">18 other AGs</a> joined the probe. Schmitt and 16 other attorneys general are also trying to <a href="https://www.governing.com/next/missouri-and-other-ags-try-to-block-californias-ev-goals" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background-image: initial; background-position: 0px 0px; background-size: initial; background-repeat: initial; background-attachment: initial; background-origin: initial; background-clip: initial; box-sizing: inherit; transition: all 500ms ease-in-out 0s;">block California from setting its own vehicle emissions standards</a>.At the same time, the nonprofit <a href="https://www.sourcewatch.org/index.php?title=State_Financial_Officers_Foundation" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background: 0px 0px rgb(255, 153, 0); box-sizing: inherit; transition: all 500ms ease-in-out 0s;">State Financial Officers Foundation</a> (SFOF) and its members are doing <a href="https://www.nytimes.com/2022/08/05/climate/republican-treasurers-climate-change.html?smid=nytcore-ios-share" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background: 0px 0px rgb(255, 255, 102); box-sizing: inherit; transition: all 500ms ease-in-out 0s;">all they can</a> to prop up fossil fuel companies and punish firms that divest from oil, gas, and coal. In West Virginia, state Treasurer Riley Moore <a href="https://www.nytimes.com/2022/07/28/business/west-virginia-fossil-fuel-banks.html" data-wpel-link="external" target="blank" rel="external noopener noreferrer" style="text-decoration-line: none; font-weight: bold; color: rgb(0, 51, 153); outline: none; background: 0px 0px rgb(255, 255, 102); box-sizing: inherit; transition: all 500ms ease-in-out 0s;">told</a> five financial companies—the banks Goldman Sachs, JPMorgan, Morgan Stanley, and Wells Fargo, as well as BlackRock—that they would no longer be eligible for state contracts because they have reduced financing for coal projects.<h2 style="background-color: rgb(255, 255, 255); box-sizing: inherit; line-height: 1.2; margin: 0px 0px 10px; word-spacing: 3.6px;">Corporate Code of Silence ...</h2></div></div><div style="font-size: small; background-color: rgb(255, 255, 255);">=</div>=<a href="https://insideclimatenews.org/news/04082019/climate-change-ratings-agencies-financial-risk-cities-companies">https://insideclimatenews.org/news/04082019/climate-change-ratings-agencies-financial-risk-cities-companies</a><div class="content" style="box-sizing: inherit;"><div class="field field-name-body field-type-text-with-summary field-label-hidden" style="box-sizing: inherit;"><div class="field-items" style="box-sizing: inherit;"><div class="field-item even" property="content:encoded" style="box-sizing: inherit;">One of the main agencies that rates the creditworthiness of big borrowers, including cities and corporations, has brought on board a data firm specializing in climate risks. It's a signal that rating agencies are paying more attention to global warming and its impact in the financial markets. Credit ratings, much like individual credit scores, assess how likely it is that a borrower will repay debt. Those ratings can affect how much governments and companies are able to borrow and how much it will cost them. Just the threat of a lower credit rating can pressure cities and companies to be more proactive in taking steps to mitigate risks, and now those risks are starting to include climate change."More and more, issuers and investors want to know how they are exposed to climate events," said Michael Mulvagh, head of communications in the Americas, Europe, Africa and the Middle East for Moody's Corporation, which owns one of the largest U.S. ratings agencies. He said Moody's decision to purchase a major stake in Four Twenty Seven, a company that analyzes the risks to corporations and governments from climate extremes such as sea level rise, heat stress and storms, "will help us go deeper into and refine how we assess physical risks caused by environmental factors."For years, experts have warned about the increasing risks of climate disasters. Last year, the U.S. saw at least <a href="https://insideclimatenews.org/news/18122018/tyndall-military-hurricane-cost-2018-year-review-billion-dollar-disasters-wildfire-extreme-weather-drought-michael-florence" style="font-family: " times="Times" new="New" roman="Roman" font-size="font-size" large="large" box-sizing="box-sizing" inherit="inherit" text-decoration-line="text-decoration-line" none="none" font-weight="font-weight" bold="bold">$91 billion in damage</a> from the costliest storms, drought and wildfires, according to the National Oceanic and Atmospheric Administration. And some analysts have criticized the financial sector—particularly around bond ratings—for moving too slowly in incorporating climate risks into their credit assessments.The move by Moody's signifies a notable step toward financial institutions committing to the idea that climate change should be a routine consideration when evaluating the financial strength of any government or company and their ability to pay their debts. "For [Moody's] to come and buy this company that's very focused and has some expertise in climate risks, it looks like they're making this a very big priority," said Kathy Hipple, a financial analyst with the Institute for Energy, Economics and Financial Analysis. "I think it's very positive and should be noted by the industry."<h3 dir="ltr" style="background-color: rgb(255, 255, 255); box-sizing: inherit; margin: 0px 0px 0.5em; padding: 0px; line-height: 1.333;">Which Places and Sectors Are Most at Risk?</h3>In 2017, Moody's downgraded the city of Cape Town, South Africa, after a major drought there threatened the municipality's ability to provide water to the community. Earlier this year, it downgraded Trinity Public Utilities District in California due to the elevated risk from wildfires.Climate change-related disasters are becoming more tangible and more frequent, said Carmen Nuzzo of the United Nations-supported Principles for Responsible Investment. "They can no longer be ignored."Since about 2015, Nuzzo said, credit rating agencies, including Moody's, Standard & Poor's and Fitch Group, have been building their capacity to better analyze how climate change can factor into the financial stability of companies and governments around the world.Both Moody's and S&P have released online tools—such as Moody's <a href="https://www.moodys.com/sites/products/ProductAttachments/Infographics/Environmental-Risks-Global-Heatmap-Overview.pdf" style="box-sizing: inherit; text-decoration-line: none; font-weight: bold;">heat map</a> or S&P's <a href="https://www.spglobal.com/en/research-insights/articles/navigating-the-esg-risk-atlas" style="box-sizing: inherit; text-decoration-line: none; font-weight: bold;">ESG Risk Atlas</a>—to gauge which areas and what industries face the most "exposure" to the physical impacts of climate change, as well as which are risking transitional impacts as renewable energy demand rises.According to Moody's heat map, the top industries with elevated environmental risks are unregulated utilities and power companies, the automobile industry, the oil and gas refining market and the transportation industry.For several of those industries, "the risk is quite obvious," said Mike Ferguson, director of the Sustainable Finance Team for Standard & Poor's Global Ratings. "The economy is transitioning away from what they sell."With cities and counties, ratings agencies pay attention to the local economy, including threats to the tax base, and to the government's management and financial planning, which can include <a href="http://427mt.com/2018/05/24/webinar-building-city-level-climate-resilience/" style="box-sizing: inherit; background-color: transparent; text-decoration-line: none; font-weight: bold;">whether risk-mitigation projects</a> are being completed. Once a government is struggling with climate-related damages, such as from hurricanes or flooding, higher borrowing costs can become a vicious circle.<h3 dir="ltr" style="background-color: rgb(255, 255, 255); box-sizing: inherit; margin: 0px 0px 0.5em; padding: 0px; font-weight: normal; line-height: 1.333;">Slow Start, but 'Going in the Right Direction'</h3>Hipple said credit rating agencies, especially around the bond market, have been slow to act on climate change, but they're "going in the right direction."To some degree, credit rating agencies have always considered climate risks when assigning credit ratings, Nuzzo said, but only recently did agencies start routinely and explicitly incorporating climate risks into their assessment processes."Before, they were only looking at balance sheets," she said. "They still do, but they're also asking questions about how climate change can affect cash flow, costs, revenues, profits."Ferguson said he has also seen an increase in credit ratings actions based on climate risks being a major factor. Between 2015 and 2017, he said, about 15 percent of corporate global ratings actions were based on climate risks as a main factor.Still, Rachel Cleetus, the lead economist and climate policy manager at the Union of Concerned Scientists, thinks the financial sector could be doing more, especially when it comes to pressuring high-risk areas and industries to adapt more quickly to climate risks. "Everyone agrees that the science is real, the risk is real," she said, "but the market isn't accurately pricing it yet."Published Aug. 5, 2019</div></div></div></div><div class="tagged-with" style="box-sizing: inherit; text-transform: uppercase; margin-bottom: 1em; background-color: rgb(255, 255, 255);"><label style="box-sizing: inherit; display: block; line-height: 1.2;">PUBLISHED UNDER:</label><div class="field field-name-field-topics field-type-taxonomy-term-reference field-label-hidden" style="box-sizing: inherit;"><div class="field-items" style="box-sizing: inherit;"><div class="field-item even" style="box-sizing: inherit; display: inline-block; padding-right: 0.5em;"><a href="https://insideclimatenews.org/topics/business-and-accountability-0" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="" style="box-sizing: inherit; background-color: transparent; text-decoration-line: none;">BUSINESS AND ACCOUNTABILITY</a></div> <div class="field-item odd" style="box-sizing: inherit; display: inline-block; padding-right: 0.5em;"><a href="https://insideclimatenews.org/topics/extreme-weather" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="" style="box-sizing: inherit; background-color: transparent; text-decoration-line: none;">EXTREME WEATHER</a></div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-hidden" style="box-sizing: inherit;"><div class="field-items" style="box-sizing: inherit;"><div class="field-item even" style="box-sizing: inherit; display: inline-block; padding-right: 0.5em;"><a href="https://insideclimatenews.org/topic/climate-change" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="" style="box-sizing: inherit; background-color: transparent; text-decoration-line: none;">CLIMATE CHANG</a>e</div></div></div></div>7. <a href="http://www.standardandpoors.com/spf/upload/Events_US/US_PF_Event_RFCRndTblsJan2015_Article1.pdf?sp_mid=45636&sp_rid=1194646&utm_content=buffere2615&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer" target="blank" style="box-sizing: border-box; margin: 0px; padding: 0px; text-decoration: none; transition: color 0.2s linear 0s; line-height: 25.2px; background: rgb(255, 255, 255);">Standard & Poor’s</a> and <a href="https://www.moodys.com/research/Moodys-requests-comment-on-proposed-methodology-for-rating-US-municipal--PR_305265?WT.mc_id=NLTITLE_YYYYMMDD_PR_305265" target="blank" style="box-sizing: border-box; margin: 0px; padding: 0px; text-decoration: none; transition: color 0.2s linear 0s; line-height: 25.2px; background: rgb(255, 255, 255);">Moody’s</a> are making big changes in how they scrutinize water systems that borrow money—via bonds—for major water infrastructure projects. If the changes are finalized next year, these critical credit-rating agencies will include climate risks in evaluating water utility bonds. The changes—which Ceres has been advocating since publishing a <a href="http://www.ceres.org/resources/reports/water-bonds/view" target="blank" style="box-sizing: border-box; margin: 0px; padding: 0px; text-decoration: none; transition: color 0.2s linear 0s; line-height: 25.2px; background: rgb(255, 255, 255);">report on water bond risks</a> several years ago—send an important signal that water systems may get higher credit ratings if they invest in systems more resilient to drought and flooding, and lower ratings if they are especially vulnerable to extreme weather. A higher credit rating can mean lower interest rates, which translates to more affordable consumer water bills.

Victor JuhaszThe Last Mystery of the Financial CrisisBY MATT TAIBBI | June 19, 2013What about the ratings agencies?
That's what "they" always say about the financial crisis and the teeming rat's nest of corruption it left behind. Everybody else got plenty of blame: the greed-fattened banks, the sleeping regulators, the unscrupulous mortgage hucksters like spray-tanned Countrywide ex-CEO Angelo Mozilo.
But what about the ratings agencies? Isn't it true that almost none of the fraud that's swallowed Wall Street in the past decade could have taken place without companies like Moody's and Standard & Poor's rubber-stamping it? Aren't they guilty, too?
Man, are they ever. And a lot more than even the least generous of us suspected.
Everything Is Rigged: The Biggest Price-Fixing Scandal Ever
Thanks to a mountain of evidence gathered for a pair of major lawsuits by the San Diego-based law firm Robbins Geller Rudman & Dowd, documents that for the most part have never been seen by the general public, we now know that the nation's two top ratings companies, Moody's and S&P, have for many years been shameless tools for the banks, willing to give just about anything a high rating in exchange for cash.
In incriminating e-mail after incriminating e-mail, executives and analysts from these companies are caught admitting their entire business model is crooked.
"Lord help our fucking scam?.?.?.?this has to be the stupidest place I have worked at," writes one Standard & Poor's executive. "As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it," confesses a high-ranking S&P analyst. "If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value," complains another senior S&P man. "Let's hope we are all wealthy and retired by the time this house of card[s] falters," ruminates one more.
Ratings agencies are the glue that ostensibly holds the entire financial industry together. These gigantic companies – also known as Nationally Recognized Statistical Rating Organizations, or NRSROs – have teams of examiners who analyze companies, cities, towns, countries, mortgage borrowers, anybody or anything that takes on debt or creates an investment vehicle.
Their primary function is to help define what's safe to buy, and what isn't. A triple-A rating is to the financial world what the USDA seal of approval is to a meat-eater, or virginity is to a Catholic. It's supposed to be sacrosanct, inviolable: According to Moody's own reports, AAA investments "should survive the equivalent of the U.S. Great Depression."
The Scam Wall Street Learned From the Mafia
It's not a stretch to say the whole financial industry revolves around the compass point of the absolutely safe AAA rating. But the financial crisis happened because AAA ratings stopped being something that had to be earned and turned into something that could be paid for.
That this happened is even more amazing because these companies naturally have powerful leverage over their clients, as they are part of a quasi-protected industry that enjoys massive de facto state subsidies. Largely that's because government agencies like the Securities and Exchange Commission often force private companies to fulfill regulatory requirements by retaining or keeping in reserve certain fixed quantities of assets – bonds, securities, whatever – that have been rated highly by a "Nationally Recognized" ratings agency, like the "Big Three" of Moody's, S&P and Fitch. So while they're not quite part of the official regulatory infrastructure, they might as well be.
It's not like the iniquity of the ratings agencies had gone completely unnoticed before. The Financial Crisis Inquiry Commission published a case study in 2011 of Moody's in particular and discovered that between 2000 and 2007, the agency gave nearly 45,000 mortgage-backed securities AAA ratings. One year Moody's doled out AAA ratings to 30 mortgage-backed securities every day, 83 percent of which were ultimately downgraded. "This crisis could not have happened without the rating agencies," the commission concluded.
Thanks to these documents, we now know how that happened. And showing as they do the back-and-forth between the country's top ratings agencies and one of America's biggest investment banks (Morgan Stanley) in advance of two major subprime deals, they also lay out in detail the evolution of the industrywide fraud that led to implosion of the world economy – how banks, hedge funds, mortgage lenders and ratings agencies, working at an extraordinary level of cooperation, teamed up to disguise and then sell near-worthless loans as AAA securities. It's the black box in the American financial airplane.
In April, Moody's and Standard & Poor's settled the lawsuits for a reported $225 million. Brought by a diverse group of institutional plaintiffs with King County, Washington, and the Abu Dhabi Commercial Bank taking the lead, the suits accused the ratings agencies of conspiring in the mid-to-late 2000s with Morgan Stanley to fraudulently induce heavy investment into a pair of doomed-to-implode subprime-laden deals, called Cheyne and Rhinebridge.
Stock prices for both companies soared at the settlement, with markets believing the firms would be spared the hell of reams of embarrassing evidence thrust into public view at trial. But in a quirk, an earlier judge's ruling had already made most of the documents in the case public. Although a few news outlets, including The New York Times, took note at the time, the vast majority of the material was never reported, and some was never seen by reporters at all. The cases revolved around a highly exotic and complex financial instrument called a SIV, or structured investment vehicle.
The SIV is a not-so-distant cousin of the special purpose entity, or SPE, which was the main weapon of destruction in the Enron scandal. The corporate scam du jour in those days was mass accounting fraud, in which a company would create an ostensibly independent corporate structure that would actually be controlled by its own executives, who would then move their company's liabilities off their own books and onto the remote-controlled SPE, hiding the firm's losses.
The SIV is a similar concept. They first started showing up in the late Eighties after banks discovered a loophole in international banking standards that allowed them to create SPE-like repositories full of assets like mortgage-backed securities and keep them off their own books.
These behemoths operated on the same basic concept as an ordinary bank, which borrows short-term cash from depositors and then lends money long-term in the form of things like mortgages, business loans, etc. The SIV did the same thing, borrowing short-term from investors and then investing long-term on things like student loans, car loans, subprime mortgages. Like banks, a SIV made money on the spread between its short-term debt and long-term investments. If a SIV borrowed on the commercial paper market at 3 percent but earned 6.5 percent on subprime mortgages, that was an easy 3.5 percent profit.
The big difference is a bank has regulatory capital requirements. A SIV doesn't, and being technically independent, its potential liabilities don't show up on the books of the megabank that created it. So the SIV structure allowed investment banks to create and take advantage of, without risk, billions of dollars of things like subprime loans, which became the centerpiece of the new trendy corporate scam – creating and then selling masses of risky mortgage-backed securities as AAA investments to institutional suckers.

Ratings agencies helped this game along in two ways. First, banks needed them to sign off on the bogus math of the subprime era – the math that allowed banks to turn pools of home loans belonging to people so broke they couldn't even afford down payments into securities with higher credit ratings than corporations with billions of dollars in assets. But banks also needed the ratings agencies to sign off on the safety and reliability of these off-balance-sheet SIV structures.
The first of the two SIVs in question was dreamed up by a London-based hedge fund called Cheyne Capital Management (pronounced like Dick "Cheney"), run by an ex-Morgan Stanley banker duo who hired their old firm to build and stock this vast floating Death Star of subprime loans.
Morgan Stanley had multiple motives for putting together the Cheyne deal. For one thing, it earned what the bank's lead structurer affectionately called "big fat upfront fees," which bank executives estimated would eventually add up to $25 million or $30 million. It was a lucrative business, and the top dogs wanted the deal badly. "I am very focused on?.?.?.?getting this deal done to get NY to stop freaking out" and "to make our money," said Robert Rooney, the senior Morgan Stanley executive on the deal. A spokesman for Morgan Stanley, however, told Rolling Stone, "Our sole economic interest was in the ongoing success of the SIV."
But that wasn't Morgan Stanley's only motive. Not only could the bank make the "big fat upfront fees" for structuring the deal, they could also turn around and sell scads of their own mortgage-backed securities to the SIV, which in turn would be marketed to investors like Abu Dhabi and King County. In Cheyne, 25 percent of the original assets in the deal came from Morgan Stanley – over time, $2 billion of the SIV's $9 billion to $10 billion portfolio of assets came from the bank as well.
Internal Morgan Stanley memorandums show that the bank knowingly stuffed mortgages in the SIV whose borrowers were, to say the least, highly suspect. "The real issue is that the loan requests do not make sense," complained a Morgan Stanley employee back in 2005. He noted loans had been made to a "tarot reading house" operator who claimed to make $12,000 a month, and a "knock off gold club distributor" who claimed to make $16,000 a month. "Compound these issues," he groaned, "with the fact that we are seeing what I would call a lot of this type of profile."
No matter – into the soup it went! Morgan sold mountains of this crap into Cheyne's SIV, where it was destined to be sold off to other suckers down the line. The only thing that could possibly get in the way of the scam was some pesky ratings agency.
Fortunately for the bank and the hedge fund, these subprime SIVs were a relatively new kind of investment product, so the ratings agencies had little to go on in the area of historical data to measure these products. One might think this would make the ratings agencies more conservative. In fact, caution in the face of the unknown was supposed to be a core value for these companies. As Moody's put it, "Triple-A structures should not be highly dependent on untestable assumptions."
But when it came to the Cheyne SIV, Moody's punted on caution. In an e-mail sent to executives from both Morgan Stanley and Cheyne in May 2005, David Rosa, a Moody's senior analyst, admitted that when it came to this SIV, he had nothing to go on.
"Please note that in relation to assumed spread [volatility] for the Aa and A there is no actual data backing up the current model assumptions," he wrote. In lieu of such data, he went on, "We will for now accept the proposal to use the same levels as [residential mortgage-backed securities] given that this assumption is supported by the analysis of the Aaa data?.?.?.?and Cheyne's comments on their views of this asset class."
Translation: We have no historical data, so we'll just accept your reasoning for the time being, even though you have every incentive in the world to lie about the quality of your product.
At one point, a Morgan Stanley analyst even claimed that the bank had written, in Moody's name, an entire 12-page "New Issue Report" for the Cheyne SIV – a kind of ratings summary in which Morgan Stanley appears to have given itself AAA ratings for large chunks of the deal. "I attach the Moody's NIR (that we ended up writing)," yawns Morgan Stanley fixed-income employee Rany Moubarak in a March 2006 e-mail. The attached document came proudly affixed with the "Moody's Investors Service" logo. (Both Moody's and Morgan Stanley deny that anyone other than Moody's wrote that report.)
Morgan Stanley ended up getting both Moody's and S&P to rate the deal, and that was not only common, it was basically industry practice. There were many reasons for this, but a big one was a concept called "notching," in which the agencies gave ratings penalties to any instrument that had not been rated by their own company. If a SIV contained a basket of mortgage-backed securities rated AA by Standard & Poor's, Moody's might "notch" those underlying securities down to A, or even lower. This incentivized the banks to hire as many ratings agencies as possible to rate every investment vehicle they created.
Again, despite the fact that the ratings agencies enjoyed broad quasi-official subsidies, and despite the powerful market leverage that techniques like "notching" gave them, they still routinely chose to roll over for banks. And the biggest companies were equally guilty. In the case of the Cheyne deal, Standard & Poor's was every bit as craven as Moody's.
In September 2004, an S&P analyst named Lapo Guadagnuolo sent an e-mail to Stephen McCabe, the agency's lead "quant" on the Cheyne deal, who apparently was on vacation. The e-mail chain was mostly a bunch of office gossip, where the two men e-whispered about an employee who was about to quit. But sandwiched in the office banter was an offhand line about the Cheyne deal and how full of shit it was. "Hi Steve!" Guadagnuolo wrote cheerily, adding, "How is Australia and how was Thailand????Back to [Cheyne]?.?.?.?As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it?.?.?.
"Thanks and regards?.?.?.?have you heard that [redacted] has resigned .?.?. and somebody else will follow suit today!!"
McCabe, blowing off the "no science behind it" comment, answered eagerly, "Who, Who, Who????" The quadruple question mark must be an S&P-ism.
A month later, McCabe seemed more concerned about the lack of science in the Cheyne deal. He complained in an e-mail to his boss, Kai Gilkes, who was the agency's senior quantitative analyst in Europe.
"From looking at the numbers it is quite obvious that we have just stuck our preverbal [sic] finger in the air!!" he fumed.
Gilkes was experiencing his own crisis of conscience by mid-2005, complaining in an oddly wistful e-mail to another S&P employee that the good old days of just giving things the ratings they deserved were disappearing. "Remember the dream of being able to defend the model with sound empirical research?" he wrote on June 17th, 2005. "If we are just going to make it up in order to rate deals, then quants are of precious little value."
Frank Parisi, Standard & Poor's chief credit officer for structured finance, was even more downtrodden, saying that the model that his company used to rate residential mortgage-backed securities in 2005 and 2006 was only marginally more accurate than "if you just simply flipped a coin."

Given all of this, why would top analysts from both Moody's and Standard & Poor's rate such a massive deal like Cheyne without any science to back it up? The answer was simple: money. In the old days, ratings agencies lived on subscriptions sold to investors, meaning they were compensated – indirectly, incidentally – by the people buying the financial products.
But over time, that model morphed into the current "issuer pays" model, in which a company like Moody's or Standard & Poor's is paid directly by the "issuer" – i.e., the company that is actually making the financial product.
For Cheyne, for instance, the agencies were paid in the area of $1 million to $1.5 million to rate the deal by Morgan Stanley, the very company with an interest in getting a high rating. It's the ultimate in negative incentives, and was and continues to be a major impediment to honest analysis on Wall Street. Michigan Sen. Carl Levin, one of the few lawmakers to focus on reforming the ratings agencies after the crash, put it this way: "It's like one of the parties in court paying the judge's salary."
Thanks to this model, ratings-agency business soared during the bubble era. A Senate report found that fees for the "Big Three" doubled between 2002 and 2007, from $3 billion to $6 billion. Fees for rating mortgage-backed securities at both Moody's and S&P nearly quadrupled.
So there were powerful incentives to whitewash deals like Cheyne. The eventual president of Moody's, Brian Clarkson, actually copped to this awful truth in writing, in a 2004 internal e-mail. "To put it bluntly," he wrote, "the issuer could take its business elsewhere unless the rating agency provides a higher rating."
Both Moody's and Standard & Poor's employees described complex/exotic new financial products like CDOs and SIVs as "cash cows," and behind closed doors, executives talked openly about the financial pressure to give scientifically unfounded analysis to products the banks wanted to sell.
The minutes from a 2007 conference of Standard & Poor's executives show that the raters knew they were in way over their heads. Admitting that it was virtually impossible to accurately rate, say, a synthetic derivative loan deal with underlying assets in China and Russia, one executive candidly admits, "We do not have the capacity nor the skills in house to rate something like this." Another counters, "Market pressures have significantly risen due to 'hot money.'" The first retorts that bankers are pushing boundaries, asking the raters to help them play the highly cynical hot-potato game, in which bad loans are originated en masse and then instantly passed off to suckers who will take on all the risk. "Bankers say why not originate bad loans, there is no penalty," the executive muses.
Hilariously – or tragically, depending on your point of view – an S&P executive at the conference even tossed off a quick visual sketch of their company's moral quandary. The picture is atrociously drawn (it looks like a junior high school student's rendering of a ganglion cell) and comes across like the Wall Street version of Hamlet, showing the industry traveling down a road and reaching a "Choice Point" crossroads, where the two options are "To Rate" and "Not Rate."
The former – basically taking the money and just rating whatever crap the banks toss their way – is crudely depicted as a wide, "well marked super highway." Meanwhile the honorable thing, not rating shitty investments, is shown to be a skinny little roadlet, marked "Dark and narrow path less traveled."
Obviously, the ratings agencies like S&P ultimately decided to take the road more traveled, choosing profits over scruples. Not that there wasn't some token resistance at first. For instance, some at S&P hesitated to allow the use of a questionable technique called "grandfathering," in which old and outdated rating models were used to rate newly issued investments.
In one damning e-mail chain in November 2005, a Morgan Stanley banker complains to an S&P executive named Elwyn Wong that S&P was preventing him from putting S&P ratings on Morgan Stanley deals that used this grandfathering technique. "My business is on 'pause' right now," the banker complains.
Wong took the news that S&P was holding up deals over the grandfathering issue badly. "Lord help our fucking scam," he said. "This has to be the stupidest place I have worked at." Wong, incidentally, was later hired by the U.S. Office of the Comptroller Currency, our top federal banking regulator.
The purists, however, couldn't hold out for long. In the Cheyne case, when one of the "quants" tried to hold the line, Morgan Stanley went over their heads to someone on the business side at the company to get the rating it wanted.
In July 2004, for instance, analyst Lapo Guadagnuolo sent an e-mail to Morgan Stanley's point man on the Cheyne deal, Gregg Drennan, and told him that the best he could do for the "mezzanine capital notes" or "MCN" piece of the SIV – a piece that Drennan wanted at least an A rating for – was BBB-plus. Drennan responded in an e-mail that CC'd Guadagnuolo's boss, Perry Inglis, telling him that Morgan Stanley "believe[s] the position the committee is taking is very inappropriate."

Ultimately, the analyst committee agreed to give the dubious Mezzanine Notes an A rating, marking the first time these middle-tier investments in a SIV ever received a public A rating. For Wall Street, this was occasion to par-tay. In the summer of 2005, one of the Cheyne hedge-funders sent out a celebratory e-mail to Morgan Stanley execs, bragging about getting the ratings companies to cave. "It is an amazing set of feats to move the rating agencies so far," the hedgie wrote. "We all do all this for one thing and I hope promotions are a given. Let's hope big bonuses are to follow."
Later on, S&P caved even further, agreeing to allow Morgan Stanley to lower the "capital buffer" in the deal protecting investors without suffering a ratings penalty. As late as February 1st, 2006, Guadagnuolo was defiantly telling Morgan Stanley that the one-percent buffer was a "pillar of our analysis." But by the next day, Morgan Stanley executive Moubarak had chopped Guadagnuolo's knees out. He cheerfully announced in a group e-mail that the bank had managed to remove this "pillar" and get the buffer knocked down to .75 percent.
Tina Sprinz, who worked for the Cheyne hedge fund, sent an e-mail that very day to Moubarak, thanking him for straightening out the pesky analysts. "Thanks for negotiating that," she says. The ratings process shouldn't be a "negotiation," yet this word appears throughout these documents.
In the Cheyne deal, just the plaintiffs in the lawsuit invested a total of $980 million in "rated notes," and those who invested in these "MCNs" were completely wiped out. Analysts from both agencies would express regret and/or trepidation about their roles in unleashing the monster deals and their failure to stop the business-side suits running the companies from selling them out. Gilkes, the S&P analyst who worried about shunning real science in favor of just making things up, later testified that the subprime assets in such SIVs were "not appropriate."
"They should not have been rated," he said.
If the significance of Cheyne is that it showed how the ratings agencies sold out in an effort to get business, the significance of the next deal, Rhinebridge, is that it showed how low they were willing to stoop to keep that business.
Rhinebridge was a subprime-packed SIV structured very much like Cheyne, only both the quality of the underlying crap in the SIV and the timing of the SIV's launch were significantly more horrible than even Cheyne's.
Not only did Morgan Stanley insist that the ratings agencies allow the bank to pack Rhinebridge full of a much higher quantity of subprime than in the Cheyne deal, they were also pushing this massive blob of toxic mortgages at a time when the subprime market was already approaching full collapse.
In fact, the Rhinebridge deal would launch with high ratings from both agencies on June 27th, 2007, less than two weeks before both Moody's and S&P would downgrade hundreds of subprime mortgage-backed securities. In other words, both Moody's and S&P were almost certainly in the process of downgrading the underlying assets in the Rhinebridge SIV even as they were preparing to launch Rhinebridge with AAA-rated notes.
"It was the briefest AAA rating in history," says the plaintiffs' lawyer Dan Drosman. "Rhinebridge went from AAA to junk in a matter of months."
There is an enormous documentary record in both agencies showing that analysts and executives knew a bust was coming long before they sent Rhinebridge out into the world with a AAA label. As early as 2005, S&P was talking in internal memorandums about a "bubble" in the real-estate markets, and in 2006 it knew that there had been "rampant appraisal and underwriting fraud for quite some time," causing "rising delinquencies" and "nightmare mortgages."
In June 2007, the same month Rhinebridge was launched, S&P's Board of Directors Report talked about a total collapse of the market. "The meltdown of the subprime-mortgage market will increase both foreclosures and the overhang of homes for sale."
It was no better at Moody's, where in June 2007, executives were internally discussing "increased amounts of lying on income" and "increased amounts of occupancy misstatements" in mortgage applications. Clarkson, who would become president two months later, was told the week before Rhinebridge launched that "most players in the market" believed subprime would "perform extremely poorly," and that the problems were "quite serious."
Yet the two ratings agencies not only kept those concerns private, they both took outlandish steps to declare just the opposite.
In a pair of matching public papers, both Moody's and S&P proclaimed that summer that while subprime might be going to hell, subprime-packed investments like SIVs might be just fine. The Moody's report on July 18th read "SIVs: An Oasis of Calm in the Sub-prime Maelstrom," while an S&P report on August 14th, 2007, was titled "Report Says SIV Ratings Are Weathering Current Market Disruptions."
The S&P report was so brazen that it even shocked a Morgan Stanley banker involved in the SIV deals. "I cannot believe these morons would reaffirm in this market," chortled the banker in an e-mail the day after the paper was released.

Rhinebridge, cheyne and a hell of a lot of other subprime investments ultimately blew to smithereens, taking with them vast amounts of cash – 40 percent of the world's wealth was wiped out in the aftermath of the mortgage bubble, according to some estimates. 2008 was to the American economy what 9/11 was to national security. Yet while 9/11 prompted the U.S. government to tear up half the Constitution in the name of public safety, after 2008, authorities went in the other direction. If you can imagine a post-9/11 scenario where there were no metal detectors at airports and people could walk on carrying chain saws and meat cleavers, you get a rough idea of what was done to reform the ratings process.
Specifically, very little was done to change the way AAA ratings are created – the "issuer pays" model still exists, and the "Big Three" retain roughly the same market share. An effort by Minnesota Sen. Al Franken to change the compensation model through a new approach under which agencies would be assigned to rate new issues through a government agency passed overwhelmingly in the Senate, but in the House it was relegated to a study by the SEC – which released its findings last year, calling for?.?.?. more study. "The conflict of interest still exists in the exact same way," says a frustrated Franken.
The companies by now are all the way back in black. In 2012, for instance, Moody's profits soared 22 percent, to $1.18 billion. McGraw-Hill, the parent company of Standard & Poor's, scored $437 million in profits last year, with the rating business accounting for 70 percent of the company's profits.
In February, the Obama Justice Department, in an action that seems belated, filed a $5 billion civil suit against Standard & Poor's, drawing upon some of the same data and documents that were part of the Cheyne and Rhinebridge suits. As part of that action, high-ranking officials at S&P were interviewed by government investigators and admitted that they had shaded their ratings methodologies to protect market share. In this deposition of Richard Gugliada, head of S&P's CDO operations, the government asks why the company was slow to implement updates to its model for evaluating CDOs:
Q: Is it fair to say that Standard & Poor's goal of preserving an increasing market share and profits from ratings fees influence the development of the updates to the CDO evaluator?
A: In part, correct.
Q: The main reason to avoid a reduction in the noninvestment grade ratings business was to preserve S&P's market share in that category, correct?
A: Correct.
Years after the crash, it's a little insulting to see industry analysts blithely copping under oath to having traded science for market share, especially since the companies continue to protest to the contrary in public. Contacted for this story, Moody's and S&P insisted many of the documents in this case were simply taken out of context, and that their analysis throughout has been rigorous, objective and independent.
It's a thin defense, but it's holding – for now. McGraw-Hill stock plunged nearly 14 percent when news of the Justice Department suit leaked, and dropped nearly 19 percent for February, but has since regained much of its value – its stock rose nearly 16 percent in March and April, as markets reacted favorably to, among other things, its recent settlement of the Cheyne and Rhinebridge suits. The markets clearly think the ratings agencies will survive.
What's amazing about this is that even without a mass of ugly documentary evidence proving their incompetence and corruption, these firms ought to be out of business. Even if they just accidentally sucked this badly, that should be enough to persuade the markets to look to a different model, different companies, different ratings methodologies.
But we know now that it was no accident. What happened to the ratings agencies during the financial crisis, and what is likely still happening within their walls, is a phenomenon as old as business itself. Given a choice between money and integrity, they took the money. Which wouldn't be quite so bad if they weren't in the integrity business.
This story is from the July 4 - July 18, 2013 issue of Rolling StoneRead more: http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619#ixzz3Nb10PZps Follow us: @rollingstone on Twitter | RollingStone on Facebook

<a rel="nofollow" target="blank" href="http://click.lists.propublica.net/?qs=f56e9472cd1a1d3004a0a4cd049578df47585ed3a152c2a5a36610649701c271" style="font-weight: bold; text-decoration: none; line-height: 1.2em; outline: none;">Bankers Brought Rating Agencies 'To Their Knees' On Tobacco Bonds</a><div class="yiv3986418386byline" style="margin: 0px 0px 10px; padding: 0px; line-height: 1.1; outline: none; zoom: 1; font-style: italic;">by Cezary Podkul | <a rel="nofollow" target="blank" href="http://click.lists.propublica.net/?qs=f56e9472cd1a1d30f38e715cf3106a7105a43108b708b14ab43e7188e80af22c" style="text-decoration: none; line-height: 1.2em; outline: none;">@Cezary</a></div>
More coverage: <a rel="nofollow" target="_blank" href="http://click.lists.propublica.net/?qs=f56e9472cd1a1d3017ea1837b88b4cdd2793378d561e500f19dd9d176dd1a224" style="font-weight: bold; line-height: 1.2em; text-decoration: none; outline: none;">Tobacco Debt: How Cash From Big Tobacco Went From Boon to Burden</a>Wall Street pressed S&P, Moody's and Fitch to assign more favorable credit ratings to their deals and bragged that the raters complied. Now many of the bonds are headed for default.==

wiki <a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis">http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis</a>

<a href="http://en.wikipedia.org/wiki/Credit_rating_agency" title="Credit rating agency" style="text-decoration: none; background: none;">Credit rating agencies</a> (CRAs) — firms which rate debt<a href="http://en.wikipedia.org/wiki/Financial_instrument" title="Financial instrument" style="text-decoration: none; background: none;">instruments</a>/<a href="http://en.wikipedia.org/wiki/Securities" title="Securities" class="mw-redirect" style="text-decoration: none; background: none;">securities</a> according to the debtor's ability to pay lenders back — played a significant role at various stages in the American <a href="http://en.wikipedia.org/wiki/Subprime_mortgage_crisis" title="Subprime mortgage crisis" style="text-decoration: none; background: none;">subprime mortgage crisis</a> of 2007-2008 that led to the <a href="http://en.wikipedia.org/wiki/2008%E2%80%932012_global_financial_crisis" title="2008–2012 global financial crisis" class="mw-redirect" style="text-decoration: none; background: none;">Great Recession of 2008-2009</a>. The new, complex securities of "<a href="http://en.wikipedia.org/wiki/Structured_finance" title="Structured finance" style="text-decoration: none; background: none;">structured finance</a>" used to finance subprime mortgages could not have been sold without ratings by the "Big Three" rating agencies — <a href="http://en.wikipedia.org/wiki/Moody%27s_Investors_Service" title="Moody's Investors Service" style="text-decoration: none; background: none;">Moody's Investors Service</a>,<a href="http://en.wikipedia.org/wiki/Standard_%26_Poor%27s#Credit_ratings" title="Standard & Poor's" style="text-decoration: none; background: none;">Standard & Poor's</a>, and <a href="http://en.wikipedia.org/wiki/Fitch_Group" title="Fitch Group" class="mw-redirect" style="text-decoration: none; background: none;">Fitch Ratings</a>. A large section of the debt securities market — many <a href="http://en.wikipedia.org/wiki/Money_market_fund" title="Money market fund" style="text-decoration: none; background: none;">money markets</a>and <a href="http://en.wikipedia.org/wiki/Pension_fund" title="Pension fund" style="text-decoration: none; background: none;">pension funds</a> — were restricted in their bylaws to holding only the safest securities — i.e securities the rating agencies designated "triple-A".<a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-McLean_p.111-1" style="text-decoration: none; white-space: nowrap; background: none;">[1]</a> The pools of debt the agencies gave their highest ratings to <a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-2" style="text-decoration: none; white-space: nowrap; background: none;">[2]</a>included over three trillion dollars of loans to homebuyers with bad credit and undocumented incomes through 2007.<a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-scourge-top-3" style="text-decoration: none; white-space: nowrap; background: none;">[3]</a> Hundreds of billions dollars' worth of these triple-A securities were downgraded to "junk" status by 2010,<a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-McLean_p.111-1" style="text-decoration: none; white-space: nowrap; background: none;">[1]</a><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-4" style="text-decoration: none; white-space: nowrap; background: none;">[4]</a><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-meltdown-5" style="text-decoration: none; white-space: nowrap; background: none;">[5]</a> and the writedowns and losses came to over half a trillion dollars.<a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-loose-6" style="text-decoration: none; white-space: nowrap; background: none;">[6]</a><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-scourge-gold-7" style="text-decoration: none; white-space: nowrap; background: none;">[7]</a> This led "to the collapse or disappearance" in 2008-9 of three major investment banks (<a href="http://en.wikipedia.org/wiki/Bear_Stearns" title="Bear Stearns" style="text-decoration: none; background: none;">Bear Stearns</a>, <a href="http://en.wikipedia.org/wiki/Lehman_Brothers" title="Lehman Brothers" style="text-decoration: none; background: none;">Lehman Brothers</a>, and <a href="http://en.wikipedia.org/wiki/Merrill_Lynch" title="Merrill Lynch" style="text-decoration: none; background: none;">Merrill Lynch</a>), and the federal governments <a href="http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program" title="Troubled Asset Relief Program" style="text-decoration: none; background: none;">buying of $700 billion of bad debt</a> from distressed financial institutions.<a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#cite_note-scourge-gold-7" style="text-decoration: none; white-space: nowrap; background: none;">[7]</a>

<h2 style="font-weight: bold; margin: 1em 0px 0.25em; overflow: hidden; padding: 0px; border: none; display: inline; line-height: 1.3; background: none;">Contents</h2>

[<a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#" class="internal" id="togglelink" style="text-decoration: none; background: none;">hide</a>] </div>

<li class="toclevel-1 tocsection-1" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Impact_on_the_crisis" style="text-decoration: none; background: none;">1 Impact on the crisis</a>

<li class="toclevel-2 tocsection-2" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Mortgage-related_securities" style="text-decoration: none; background: none;">1.1 Mortgage-related securities</a>

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<li class="toclevel-2 tocsection-4" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Downgrades_and_writedowns" style="text-decoration: none; background: none;">1.2 Downgrades and writedowns</a></li>

</ul>

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<li class="toclevel-1 tocsection-5" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Criticism" style="text-decoration: none; background: none;">2 Criticism</a>

<li class="toclevel-2 tocsection-6" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Legal_actions" style="text-decoration: none; background: none;">2.1 Legal actions</a></li>

<li class="toclevel-2 tocsection-7" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#SEC_actions" style="text-decoration: none; background: none;">2.2 SEC actions</a></li>

</ul>

</li>

<li class="toclevel-1 tocsection-8" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Explanations_for_inaccurate_ratings" style="text-decoration: none; background: none;">3 Explanations for inaccurate ratings</a>

<li class="toclevel-2 tocsection-9" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Competitive_pressure_to_lower_standards" style="text-decoration: none; background: none;">3.1 Competitive pressure to lower standards</a></li>

<li class="toclevel-2 tocsection-10" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Conflicts_of_interest" style="text-decoration: none; background: none;">3.2 Conflicts of interest</a></li>

<li class="toclevel-2 tocsection-11" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Unwillingness_to_spend_on_human_resources" style="text-decoration: none; background: none;">3.3 Unwillingness to spend on human resources</a></li>

<li class="toclevel-2 tocsection-12" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Manipulation_of_ratings" style="text-decoration: none; background: none;">3.4 Manipulation of ratings</a>

<li class="toclevel-3 tocsection-13" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Ways_of_.22gaming.22" style="text-decoration: none; background: none;">3.4.1 Ways of "gaming"</a></li>

</ul>

</li>

</ul>

</li>

<li class="toclevel-1 tocsection-14" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#Aftermath" style="text-decoration: none; background: none;">4 Aftermath</a></li>

<li class="toclevel-1 tocsection-15" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#References" style="text-decoration: none; background: none;">5 References</a></li>

<li class="toclevel-1 tocsection-16" style=" margin-bottom: 0.1em;"><a href="http://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis#External_links" style="text-decoration: none; background: none;">6 External links</a></li>

</ul>

</div>

===

<div class="byline economy"><a href="http://alternet.org">AlterNet</a> [1] / By <a href="http://www.alternet.org/authors/alex-kane">Alex Kane</a> [2]</div>

<h1 class="node-title">Matt Taibbi's Blockbuster Cover Story Exposes Key Culprits in Financial Crash</h1>

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Anyone who paid attention to the financial collapse of 2008 knows that the ratings agencies who are the arbiters of whether companies are a safe bet to take on debt played a big role. Less known are the exact details of how big a role they played. The Rolling Stone’s Matt Taibbi fills in the gaps in a <a href="http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619">blockbuster cover story.</a> [3]

<a href="http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619">Taibbi’s new piece,</a> [3] titled “The Last Mystery of the Financial Crisis,” shows in detail the role of the ratings agencies and how they rubber-stamped dubious bank transactions. The agencies Taibbi focuses on are the nation’s top two: S&P and Moody’s, which control a good chunk of the ratings agency market. Ratings agencies define what is safe to put money in and what is not. Their ratings are vitally important to the financial industry. But instead of evaluating companies objectively and giving them the ratings they deserve, Moody’s and S&P doled out top ratings to entities that were undeserving.

The new details Taibbi writes on come from documents and e-mails released as part of a lawsuit against the ratings agencies that alleged they conspired with Morgan Stanley to induce investment in subprime deals.

In April, the ratings agencies settled the lawsuit brought against them, with King County, Washington and the Abu Dhabi Commercial bank being the lead plaintiffs. The case centered on what’s known as a structured investment vehicle, or SIV.

SIVs are similar to other tools that are used by companies who want to move liabilities off their books and onto an entity where they could hide them. SIVs were used by banks to keep mortgage-backed securities--pools of mortgages, some of them bad--off their own books. “The SIV structure allowed investment banks to create and take advantage of, without risk, billions of dollars of things like subprime loans, which became the centerpiece of the new trendy corporate scam – creating and then selling masses of risky mortgage-backed securities as AAA investments to institutional suckers,” Taibbi writes.

The ratings agencies were asked to sign off on the safety of these SIVs. And that’s what they did, even if they were totally unsafe. The major reason why they would sign off on bad investments was that the same banks asking them to sign off on them were the ones giving them the money to operate as a rating agency.

In one specific case, an SIV was created by London-based hedge fund Cheyne Capital Management. The hedge fund was run by ex-employees of Morgan Stanley, which got involved in a deal to get investment into Cheyne. Morgan Stanley reaped fees from structuring the investment deal, and also earned money for selling their own mortgage-backed securities to the SIV, which were then marketed to investors like the Abu Dhabi bank. Internal documents from Morgan Stanley reveal that the bank put bad mortgages into the SIV.

The ratings agencies had nothing to go on to rate the subprime SIVs. But Moody’s and S&P--banks often used multiple ratings agencies because they often gave investments a lower rating if they weren’t involved with evaluating the deal--gave it top ratings anyway.

The ratings agencies knew they were rubber-stamping bad deals, e-mails show. “Lord help our fucking scam,” one e-mail from an S&P executive reads. “This has to be the stupidest place I have worked at.”

The ratings agencies gave top grades to another bad deal with a subprime-laden SIV called Rhinebridge. Both the Rhinebridge and Cheyne investments eventually went down the tubes, along with other subprime deals.

Despite the implosion of the U.S. economy due to the top grades these bad deals got, the system remains much the same.

“What happened to the ratings agencies during the financial crisis, and what is likely still happening within their walls, is a phenomenon as old as business itself,” writes Taibbi. “Given a choice between money and integrity, they took the money.”

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<h1 class="title-news">Under Attack, Credit Raters Turn to the First Amendment</h1>

HuffPost Investigative Fund   <a href="http://www.huffingtonpost.com/tj-ortenzi" rel="author">By Ben Protess and Lagan Sebert</a> <a href="http://www.huffingtonpost.com/2009/10/28/under-attack-credit-rater_n_337712.html?view=print&comm_ref=false#" class="fb-tooltip" style=" display: inline;"> </a> First Posted: 03/18/10 06:12 AM ET Updated: 05/25/11 03:30 PM ET

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Editor's note: This is the first of three articles by the Investigative Fund on the credit rating companies. To help with the investigation, <a href="http://www.huffingtonpost.com/2009/10/28/help-us-investigate-ratin_n_337633.html"> sign up here.</a>

For two decades, the nation's top credit rating agencies have managed to fend off a crackdown from Washington by relying on a surprising ally - the First Amendment.

Despite their key role in the most recent economic calamity, the three big bond raters--Standard & Poor's, Moody's and Fitch--seem poised to do it again. With help from two of the most storied constitutional lawyers in the country, the raters have successfully argued that when they make a mistake -- say, awarding the top triple-A grade to a multibillion-dollar bundle of bonds that later default -- they cannot be sued or held accountable.

That's because ratings are opinions, the agencies claim, protected by the constitutional right to free speech.

A Huffington Post Investigative Fund examination of court filings, congressional testimony and Securities and Exchange Commission documents illustrates how the companies have repeatedly invoked that right to free speech to dodge government regulation and court action. The raters have never lost a courtroom battle to a disgruntled investor, not even in the Enron scandal. Enron enjoyed high grades on its bonds just four days before it filed for bankruptcy in 2001.

Critics of the rating companies argue that they are misusing the Bill of Rights to protect a flawed but highly profitable business.

Frank Partnoy, who used to design investment products while working for Morgan Stanley, said that given the success of the First Amendment defense, it is not surprising the companies have published "unreasonably high" ratings. "Rating agencies have had a free go at it under a cloak of the First Amendment," said Partnoy, now a professor at the University of San Diego Law School.

But Floyd Abrams, the renowned First Amendment lawyer who has represented Standard and Poor's for more than 20 years, said the rating companies are entitled to the same free-speech protections afforded to journalists.

"It's an opinion," Abrams said. He acknowledged: "It may not be a great opinion if, when you look back on it, you say, 'you gave it triple-A, how could you do this?'"

To be sure, there have been some small cracks in the credit raters' defenses given the magnitude of the current financial crisis. Last month, a federal judge in New York declined to dismiss an investor's lawsuit even in the face of a First Amendment claim.

And on Wednesday, the House Financial Services Committee approved the latest bill designed to rein in the agencies. But after hearing testimony last month from the raters' lawyers and executives, the committee backed off a plan to make the companies collectively liable for mistakes in each others' ratings.

Partnoy said he expects lawmakers to water down most attempts at tightening regulation of the business.

"I've watched the rating agencies be recklessly wrong, over and over again, and I've seen them get nothing more than a slap on the wrist," said Partnoy, who is also an expert consultant for the government, defense attorneys and plaintiffs, including investors who sue the raters. "Anytime you can hold up the Constitution, it's going to get people's attention."

'The Safest Possible Place'

Credit raters are entrenched in the U.S. financial system.

When banks, corporations or city governments want to raise money, they issue debt in the form of bonds for investors to purchase. The rating companies judge the quality of the bonds. Ratings can range from the highly-coveted triple-A to the "junk" bond status of C or lower.

For several decades, until the early 1970s, the big three raters charged investors for ratings. Then the rating companies started charging the banks and companies that issue the bonds. That payment arrangement, critics argue, creates an inherent conflict of interest, where the agencies serve the issuers rather than the investors who rely on the ratings.

King County in Washington state relied on ratings and lost between $70 and $100 million from a several-billion dollar fund that manages, among other things, school lunch programs, according to the countys lawyers. Along with the Abu Dhabi Commercial Bank, the county filed a lawsuit against S&P and Moody's alleging that they used "flawed" assumptions to issue "false and misleading" ratings.

Some of the investments King County made were rated triple-A, its suit alleges, leading the county to believe it was making conservative decisions.

"They were trying to be good fiduciaries and put their money in the safest possible place," said Patrick Daniels, an attorney for the county.

Despite the top rating, the investment was actually quite risky. The county had bought into structured investment vehicles, which are complex bundles of bonds backed by assets such as mortgages, credit cards and car loans. When the mortgages defaulted, so went the bonds, and ultimately the county's money.

Another lawsuit brought by the California Public Employees' Retirement System alleges that the fees for rating structured products ranged from $300,000 to $1 million per deal.

Indeed, the rating companies saw their profits peak in 2006 and 2007 while structured products were flourishing. Now that bubble has burst, and the raters' profits have returned to 2005 levels. But even in a down year like 2008, S&P and Moody's generated more than $1.7 billion in revenue. Moody's last year had net income of $457 million while Standard and Poor's saw operating profits of more than $1 billion, although that total includes earnings from the S&P index.

Fitch is not a publicly traded company so its profits are unknown. Fitch and Moody's officials declined requests for an interview.

A federal judge in New York last month threw out most of King County's claims but refused to dismiss the suit altogether. In a rare defeat for the agencies' First Amendment defense, Judge Shira Scheindlin said in a preliminary ruling that because the county alleged the ratings were not widely published, the companies weren't entitled to free-speech protections.

'Part of the Culture'

Some former Moody's employees believe the rating companies are wrong to claim free-speech protections.

"To my eye, the problem with the First Amendment defense is it seems to shield them from any accountability," said Jerome Fons, a former managing director for credit quality at Moody's.

Eric Kolchinsky, a former Moody's managing director turned critic of the company, said that the First Amendment defense enabled some Moody's analysts to adopt a laissez faire attitude toward the quality of ratings. "Some people almost didn't even care because they feel it's just an opinion," said Kolchinsky, who is also a lawyer. "It's part of the culture there."

Kolchinsky added, however, that he believes the raters' First Amendment protections should not be lifted entirely.

Egan-Jones Rating Co. is a smaller competitor of the big three that sells its ratings to investors instead of bond issuers to avoid a conflict of interest. Sean Egan, the company's managing director, believes that rating companies should be entitled to some free-speech protections because "it's legitimate to make mistakes." But when bond issuers pay for ratings, Egan said, "there's a clear bias" and the "potential liability should increase."

Floyd Abrams is joined in his defense of the companies by Laurence Tribe, a longtime Harvard Law professor who was hired by Moody's in June. He was a law-school mentor to then-student Barack Obama and later became an adviser to Obama's presidential campaign.

In an interview with the Investigative Fund, Abrams said that credit ratings are educated opinions about the quality of bonds, not guarantees that the bonds will or will not default."Is it an opinion based upon a level of expert knowledge and analysis? I hope so," Abrams said. "That certainly is what rating agencies try to be and try to do."

The First Amendment protects other opinions, such as newspaper editorials, so why not credit ratings, he argues.

Abrams noted that there are some limitations to the First Amendment defense. It cannot shield the raters from fraud, he said. And even with free-speech protections, Abrams said the agencies still face some accountability for their ratings.

"We've got lots of lawsuits." About forty to be more exact, he said.

'Believe It When I See It'

Investors are also looking to Congress and the SEC to hold the rating companies accountable.

But nearly every time the SEC has broached the idea of rating agency reform, the companies have filed comments with the commission invoking the First Amendment, records show. In the face of these claims, the SEC has often either abandoned or modified some of its attempts at regulation. The rating companies said they have tightened internal controls in response to criticism and remain open to some government oversight.

More recently, the commission enacted some rating agency regulations to increase competition among the agencies and require them to disclose their conflicts of interest. The commission also approved rules this month that will require agencies to disclose a history of their ratings. It's now discussing a plan to expose the rating companies to greater liability in certain situations.

But Congress has prevented the SEC from changing the rating companies' methodologies. Abrams and agency executives have flocked to Capital Hill in recent years to remind lawmakers that those methodologies are protected by the First Amendment, congressional testimony shows.

Rep. Paul Kanjorski (D-Pa.), a member of the House Financial Services Committee, proposed a draft bill last month that would have required the companies to share liability when one violates securities laws. The committee approved a modified proposal Wednesday, by a 49-14 vote, without such a provision. The bill would instead make it easier for investors to sue the companies if they fail to follow their own rating methods, a feature sure to attract opposition from the companies as it hits the House floor and the Senate.

Partnoy, the law professor, said he doubts Congress will allow much to change.

"I'll believe it when I see it," he said. "The agencies are on their own, against common sense and public opinion, and yet they continue to win."

Maria Zilberman and Rachel Leven contributed research for this report.

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