CalPERS Says Losses Caused by Inaccurate Credit Ratings

July 15, 2009 ( - The nation's largest public pension fund has filed a lawsuit over $1 billion in losses it says were caused by "wildly inaccurate" credit ratings from the three leading ratings agencies.

According to the New York Times, the lawsuit, filed late last week in California Superior Court in San Francisco by the California Public Employees Retirement System (CalPERS), is focused on a form of debt called structured investment vehicles, complex packages of securities made up of a variety of assets, including subprime mortgages. CalPERS invested $1.3 billion in them in 2006, and they collapsed in 2007 and 2008, the news report said.

In its suit, CalPERS alleges that in giving these packages of securities the agencies’ highest credit rating, the three top ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch — “made negligent misrepresentation” to the pension fund. The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied,” the New York Times reports.

Calpers is seeking damages, but did not specify an amount. The system provides retirement benefits to 1.6 million public employees in California.

Rating agencies have taken some blame for the recent market downturn. In prepared remarks for testimony in May before the House Financial Services subcommittee on capital markets, Gregory W. Smith, general counsel of the Colorado Public Employees Retirement Association and co-chair of the Council of Institutional Investors, encouraged Congress to evaluate the appropriateness of Nationally Recognized Statistical Rating Organizations’ exemptions from liability. Smith pointed out that most institutional investors do not rely exclusively on credit ratings for buy/sell decisions, but they are part of a “mosaic of information” that is considered (see CO PERA Wants Increased Oversight of Rating Agencies ).

The CalPERS suit is here .