Market analyst Barry Ritholtz told Credit Union Times he thinks the California Public Employees' Retirement System lawsuits against ratings agencies Moody's and Standard & Poor's have the potential to "go the distance," because Calpers cares more about punishing them than recovering credit losses.
Ritholtz is CEO of New York-based investment software firm FusionIQ, and is a frequent guest on CNBC shows The Kudlow Report and Squawk Box. Ritholtz said he agrees with others who have called ratings agencies the "prime enablers of the credit crisis."
He said ratings agencies' First Amendment defense, that ratings are only opinions, is flawed because conflict of interest wasn't disclosed. In the Calpers case, it was an agreement with bond issuers that ratings agencies would benefit financially according to how well the bonds sold, he said.
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"When you're participating in the sales of the bonds you're rating, you're no longer an objective third party. Now, you're an underwriter," Ritholtz said.
The NCUA Board discussed ratings agencies and their role in corporate losses during an Oct. 16, 2008, closed meeting. Capital markets specialist Richard Mayfield said ratings agencies "dropped the ball" when they assigned AAA ratings to entire senior tranches, which included senior mezzanine pieces backed by Alt-A and subprime mortgages.
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