PrefBlog

There’s an interesting twist in emerging Credit Rating Agency law:

A U.S. judge refused to dismiss a lawsuit against Moody’s Investors Service Inc. and Standard & Poor’s, rejecting arguments that investors can’t sue over deceptive ratings of private-placement notes because those opinions are protected by free-speech rights.
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U.S. District Judge Shira Scheindlin in New York rejected the ratings firms’ arguments yesterday, forcing them and Morgan Stanley, which was also sued, to respond to fraud charges in a class-action by investors claiming the raters hid the risks of securities linked to subprime mortgages.
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Scheindlin said in her ruling that the First Amendment of the U.S. Constitution doesn’t provide a defense the case because the rating firms’ comments were distributed privately to a select group of investors and not to the general public.

Without ruling on the merits of the lawsuit, the judge said opinions by the ratings companies may be the basis for a lawsuit “if the speaker does not genuinely and reasonably believe it or if it is without basis in fact.” She said there are enough facts alleged against the two agencies and Morgan Stanley, the sixth-biggest U.S. bank by assets, for the lawsuit to go forward with evidence gathering needed for any trial.

It seems pretty strange to me, but I’m prepared to concede that Scheindlin knows American constitutional law than I do! I don’t understand, however, why the CRAs have a duty to tell the truth. So they lie. So? The only person who’s paying them is the issuer. It also seems to me to be a reasonably easy lawsuit to defend: the CRAs simply have to show that they used a reasonable model such as the one they used for everything else.

Private Equity methodology is changing:

The world’s biggest private-equity firms, shut out of the market for leveraged buyouts as banks curtail lending, are turning to bankruptcy courts to make acquisitions.

KKR & Co., the New York takeover firm co-founded by Henry Kravis, is part of a group converting loans made to Lear Corp. into a controlling stake in the bankrupt car-seat maker. Late yesterday, Hayes Lemmerz International Inc. said it reached an agreement with the lenders who financed its bankruptcy, giving them an equity stake in the maker of wheels for cars. This year, 162 companies merged or were bought out of bankruptcy, a 60 percent jump from the same period in 2008 and almost triple the amount in 2007, according to data compiled by Bloomberg.
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“It’s not a tactic that private-equity firms have historically employed, but it seems to be an idea whose time has come,” said Steven Smith, global head of leveraged finance and restructuring at UBS AG in New York. “This is clearly one of the new and most distinctive features of the current wave of restructurings.”

PerpetualDiscounts continued to give ground today, losing 31bp agains a FixedReset gain of 6bp; all this happened on relatively light volume and muted volatility: the Performance Highlights chart is pretty skimpy today.

This entry was posted on Thursday, September 3rd, 2009 at 8:40 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.