Wat onze EU (U weet wel de sterke vuist in de wereldeconomie) niet aandurfde knappen onze vrienden Down Under dan maar voor ons op. 13 Australische gemeenten hebben Standard & Poor’s voor de rechter gesleept vanwege misleidende adviezen. Deze gemeenten hadden beleggingsproducten gekocht die door S & P waren voorzien van een AAA rating maar die bleken na twee jaar dus waardeloos te zijn. Mooiste is nog dat S & P bij het geven van deze rating bling gebruik heeft gemaakt van het advies van ABNAMRO.
Nu heeft het Federale Gerechtshof in Australië in al haar wijsheid besloten dat S & P haar cliënten heeft misleid en dat ze een schadevergoeding van $ 30 miljoen moeten betalen. Er loopt ook nog een tweede rechtszaak ter hoogte van $ 140 miljoen. S & P gaat wel nog in hoger beroep maar het kwaad is geschied. Inmiddels loopt er ook een rechtszaak tegen The Commonwealth Bank, een van de grootste banken van Australië.
Het zal Finch en Moody’s nu wel dun door de broek lopen.
Vanwege de soms trage internet verbinding met Down Under copy ik het gehele artikel na de break.
A decision in an Australian court could have worldwide ramifications for ratings agency
THE workings of ratings agencies saw investors sold duds posing as top-notch investments, says Jessica Irvine.
AUSTRALIANS have a tendency to feel insignificant on the global stage. But it’s time to take a bow.
It has taken an Australian court to expose and bring to justice the despicably lax moral standards of investment bankers and credit ratings agencies that helped create the global financial crisis which destroyed jobs and retirement nest eggs the world over.
Ever felt bamboozled by the world of high finance?
Well, don’t worry. It’s not you, it’s them.
In a world first, the Federal Court of Australia ruled on Monday that one of the world’s biggest credit rating agencies, Standard & Poors, was guilty of negligence when it gave its highest credit rating of AAA to a financial asset created by investment bank, ABN Amro, which sold it to 13 Australian local councils in 2006.
The councils lost $16 million when the asset proved worthless within two years.
They stand to recoup about $30 million in costs and damages. S&P has announced it will appeal.
The landmark decision opens the way for a global wave of copycat litigation by other angry investors sold financial duds disguised as top-notch investments in the run-up to the GFC.
Credit ratings agencies are supposed to be the trusted gatekeepers of financial markets, assigning a rating to financial institutions and financial products depending on how risky they are.
Turns out ratings agencies are often just rubber stamps, guns for hire.
They are paid to rate particular financial assets by the creators of those assets. And worse, they are paid not on the quality or accuracy of those ratings, but according to the volume of ratings they produce.
In the debt-fuelled heady days before the GFC, these agencies rushed to write as many ratings as possible.
They became overstretched and completely out of their depth to understand the products they were rating.
These, by the way, are the same credit ratings agencies that rank the Australian Government AAA and our banks some of the top AA-rated banks in the world.
State governments contort their budgets to satisfy their demands. Remember that the next time you hear some politician arguing budget cuts are necessary to maintain a certain credit rating.
So how have they got away with it?
In the US, ratings agencies have avoided lawsuits and deflected blame by pleading the right to free speech.
They argue it’s just an opinion to say a financial product is AAA-rated. Buyer beware!
Sorry. It’s not good enough, according to federal court Justice Jayne Jagot.
“The very purpose of a rating is to provide investors with independent information by persons expert in assessing the creditworthiness of an investment so that, by a simple system of letters, an investor can know and compare the creditworthiness of investments,” she wrote in her damning 1459-page judgment.
Justice Jagot found S&P had been “negligent” and “misleading and deceptive” in assigning its AAA rating to the financial asset sold by ABN Amro (which has since been taken over by Royal Bank of Scotland).
The asset was “grotesquely complex” and S&P failed to undertake basic checking, which could have revealed it was a risky and highly leveraged investment.
Incredibly, S&P used a financial model created by ABN Amro to assess the riskiness of the asset. Into this model it inserted data supplied by ABN Amro, which a simple check could have revealed was completely wrong.
A key measure of market volatility was entered at 15 per cent, when it was in fact about 28 per cent.
But any higher and the asset wouldn’t have been eligible for a AAA credit rating. That suited neither ABN Amro nor S&P.
Justice Jagot found ABN Amro “sandbagged” S&P and “simply bulldozed the rating through”. For its part, S&P failed to act in a “reasonably competent” way.
As a result, local councils were sold AAA-rated assets that turned out to be worthless in less than two years.
Some councils were left unable to finance upgrades to critical community infrastructure like parks and footpaths. The follies of high falutin’ finance came crashing down on local communities.
Nowhere near enough has been done to ensure this can’t happen again, although this week’s decision is a major step forward.
Global authorities have been enforcing a higher degree of transparency in the way ratings are assigned. But that’s just not good enough. The real problem is the pay structure for ratings agencies.
As long as ratings agencies are paid for their ratings by the sellers of financial products, and not the investors who end up buying them, ratings agencies will always lean towards outcomes that are in the interest of their clients, not investors.
He who pays the piper gets to pick the tune.
It’s time these guys were held to account for their ratings. And it is encouraging that Australia that is leading the way.