Big Credit Rating Agencies Should Be Made More Accountable

Monday, August 15, 2011

Page 6

IN MY OPINION (Column)

Big Credit Rating Agencies Should Be Made More Accountable

By GERT K. HIRSCHBERG

(The writer is a retired trial lawyer, an American Board of Trial Advocates member since 1978 and a former professor of torts at five California law schools. He counts 4,000 of his former students among California’s lawyers and judges. He was presiding referee of the Disciplinary Board, later called the State Bar Court. He is a former member of the State Bar Board of Governors—1980 to 1983—and the Judicial Council of California.)

Credit rating agencies and giant banks have become so powerful that they should be regulated, subject to First Amendment restraints only. Just as one cannot falsely yell fire in a crowded theater, so the power to financially rate the government of the United States or to falsely evaluate stocks should be carefully scrutinized. This may just be an area where the First Amendment does not function properly.

Let’s evaluate the power and habits of the three giant rating agencies, i.e., Moody’s, Fitch and Standard and Poor to grade the credit rating of the United States. In the summer of 2011, the Administration and the Congress were battling debt ceiling legislation. Debt ceiling legislation has been around for many years. It is not dictated by the Constitution and has been almost automatic and non-publicized for many years. So what was the big hubbub in 2011? The rating agencies held the President and the American people hostage just like a common criminal in a police stand-off holds a victim as a hostage.

The debt ceiling is simply the limit above which the Treasury may not write a check. It has nothing to do with an appropriation. If the Treasury were to exceed the ceiling, such an expenditure would, in the language of the street, bounce. Hence, there are teeth to the debt ceiling even though in prior years it was not exercised or used as a means of political power.

A default raises the red flat for the credit agencies. They lower the rating and, if it involves the government, the lower rating would affect the interest rates we all pay, stocks will decline in value, businesses will be affected and unemployment will rise dramatically. In short, proximate cause will rear its ugly head.

There may be a First Amendment problem. To forbid or curb criticism of government seems a prima facie case of First Amendment violation. The First Amendment is a monumental goal of a free people. It need not be wasted by greed or self dealings. It is not absolute. It is limited when there is clear and present danger of serious and substantive evils, such as where one shouts fire in a crowded theater.

This is precisely the danger created by the downgrading of the United States. The saying that my country, right or wrong, is tempered by the response, my mother, drunk or sober. It seems to rise to a level not generally considered.

There is no raison d’etre for the continued existence of either the major rating agencies, i.e. Moody’s, Fitch or Standard and Poor as now constituted, or the advisory functions of self-dealing giants such as Goldman Sachs. They have sinned. They have been deceptive. They have been tortious and criminal.

Let’s look at giant banks such as Goldman Sachs whose conduct in the debt crisis of 2008 and 2009 was not just privileged. It was tortious and criminal. In the sale to the public and its customers of derivatives, credit default swaps and sub-prime mortgages, the representations of value were blatantly false and the very opposite of what Goldman Sachs told its own customers. The representations were justified before Congressional hearings as being mere opinion. The analogy to a Ponzi scheme is more appropriate.

Goldman Sachs had recommended a high rating for Lehman Brothers until the day it filed for bankruptcy. Standard and Poor admitted to a two trillion dollar error when it issued its downgrade for the rating of the United States. It was not a minor error. It was discovered and admitted to within two hours of its submission to the Treasury Department. Should such agencies be rampant and dictate the economies of the world? To pose the questions is to answer it.