A major test case has pointed the finger of GFC blame
squarely at the ratings agencies who told bare-faced lies about the
quality of exotic financial instruments that turned out to be
Standard & Poor's and investment bank ABN Amro have gone
down in the Federal Court for, respectively, rating and selling
this rubbish to gullible local councils who were looking for high
but safe returns for their ratepayers' money.
Amro put together a bunch of CPDOs (Constant Proportion Debt
Obligations) and had them rated AAA by S&P, then sold them on
to the councils. After only six months the councils had lost 90% of
the value of their investments, about $30 million.
What the court said
Both Amro and S&P were found liable for negligence and
misleading conduct. Basically, they owed a duty of care to the
investors and didn't come even close to fulfilling it, on top
of which they simply lied about the safety of the CPDOs.
Interestingly, S&P aimed to refute that it did not owe a
duty of care to the investors because the rating was not provided
directly to the investors but to Amro, and that was the extent of
S&P's liability. The Court said S&P was aware that the
rating would be published to the prospective investors and that it
would be relied upon them in deciding whether to purchase the
S&P will appeal the decision but this judgment is important
as it constitutes a world first adverse finding against a rating
agency. Many many billions of dollars went south in the GFC on
worthless products like CPDOs, and the ratings agencies were
involved in every deal. Their potential total liability is
incalculable. What comes sharply into focus is the inherent
conflict the ratings agencies have when they are providing ratings
they know investors will rely on, while being paid by the
financiers who need them to give high ratings so they can sell the
products to the punters. It's a recipe for exactly the type of
disaster the GFC has been. A bit like paying off the ref.
We can't see why this isn't exactly the right outcome,
but won't be surprised if it gets overturned on appeal.
We do not disclaim anything about this article. We're
quite proud of it really.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Sportscraft refunds and returns policy limitations went beyond consumer's rights under the Australian Consumer Law.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).