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Calpers, the biggest U.S. public pension fund, has sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.
The California Public Employees’ Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody’s Investors Service Inc, Standard & Poor’s and Fitch Inc.
SIVs are complex packages of loans and debt, including subprime mortgages and collateralized debt obligations, assembled by investment banks and then sold to investors.
By giving these securities their highest ratings, the agencies “made negligent misrepresentations” to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, “proved to be wildly inaccurate and unreasonably high.”
Calpers, which seeks unspecified damages, had no additional comment on the suit, its timing or why no bank underwriters were named as defendants. Pension spokesman Clark McKinley acknowledged only, “there are a lot of potential targets that we have” in this matter.
All three agencies said they would seek to dismiss the complaint as soon as possible.
Moody’s Corp., parent of Moody’s, said, “Our role in the market is simply to offer reasoned, forward-looking opinions on credit risk … There is nothing in the Calpers complaint to suggest that Moody’s policies were not followed in this particular case.”
“The claim is without legal or factual merit, and we will take action to have it dismissed,” said Steven Weiss, spokesman for S&P parent McGraw-Hill.
“Fitch believes that the claim is without merit and intends to defend against the claim vigorously,” said spokesman Kevin Duignan. Fitch is part of France’s Fimalac SA.
The lawsuit from the powerful pension investor is the latest assault on the ratings agencies, which are under fire for their role in assigning top grades to investments that ultimately proved reckless.
Triple-A ratings are also blamed for fueling the explosion of the mortgage-backed securities and other structured debt investments that have wreaked havoc on Wall Street for nearly three years.
Issuers pay ratings agencies to grade their securities. Lawmakers and some investors say this model serves the interest of bank underwriters at the expense of those who buy the securities.
Calpers said that in 2006 it bought $1.3 billion of medium and short-term debt issued by three SIVs: Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc. At the time, senior debt issued by these entities were rated AAA by S&P and Aaa by Moody’s. Fitch gave Sigma, formed by London-based Gordian Knot in 2005, a AAA rating.
But the credit crunch that seized capital markets in 2007 led plunging prices for mortgages and other debt. SIVs led to massive writedowns for banks and funds that held them.
Sigma “collapsed” over the next two years, Calpers said, resulting in “hundreds of millions, and perhaps more than $1 billion, of investment losses.”
Calpers, which manages about $173 billion of pensions, noted the agencies had received “huge fees” from the issuers of the SIV. The “methods used to rate the SIVs and their underlying assets were seriously flawed in conception and incompetently applied,” the lawsuit said.
According to the suit, a hearing is scheduled for Dec. 11.
(Additional reporting by John Parry, Dena Aubin and Tom Ryan in New York and Hezron Selvi in Bangalore; Editing by Muralikumar Anantharaman, Lisa Von Ahn, Matt Daily and Steve Orlofsky)