CalPERS Lawsuit "Just the Tip of the Iceberg" for Rating Agencies, Wall St., Alpert Says

A big story that got a little lost in all the earnings and healthcare headlines this week comes to us out of California. The California Public Employees' Retirement System (aka CalPERS) - the nation’s largest pension fund - is suing Wall Street’s top three credit rating agencies.

CalPERS blames Moody's Investors Service, Standard & Poor's and Fitch Ratings for more than $1 billion in investment losses. The suit filed in San Francisco Superior Court, claims ratings agencies gave investments "wildly inaccurate and unreasonably high" grades.

According to published reports, spokesmen for the rating agencies claim the allegations in the CalPERS lawsuit are meritless and said they would seek a dismissal as quickly as possible.

But Dan Alpert, founder of the boutique investment bank Westwood Capital,
thinks CalPERS has a case: “The ratings agencies took liberties here they never should have” when they handed out AAA ratings on securities backed by subprime mortgages, among other other risky housing-related securities, he says.

Alpert believes the agencies lost their way as “gatekeepers” during the halcyon days and ignored warning signs the housing bubble was about to burst.  “Consequently, they are at risk right now for lawsuits on a whole variety of cases,” he says. The CalPERS suit is 
“just the tip of the iceberg.”

Beyond Moody’s, Fitch and S&P’s parent McGraw-Hill, Alpert thinks the legal fallout could spread to the Wall Street firms that created these toxic assets in the first place. “Goldman Sachs at $150 -- one might say, what’s risk they face going forward in litigation risk?,” Alpert muses.
Because “the amounts at stake here were in the trillions…the damages may be immense.”

You don’t have to remind CalPERS, they lost a total of $60 billion last year, one of the biggest casualties of a credit bubble in which the rating agencies played a central role.