One of the rating agencies' best friends, the First Amendment, is starting to distance itself. Had Moody's and S&P broadcast their opinions on why subprime MBS deserved AAA ratings to the masses, they may have been able to dodge the current class action lawsuit facing them and Morgan Stanley regarding the implosion of Cheyne Finance Plc. But because they saved their free speech for a select group of investors, a judge ruled the triumvirate will have to spend some time drafting carefully worded responses to explain their take on the inherent credit quality of subprime assets.
Without ruling on the merits of the lawsuit, the judge said opinions by the ratings companies may be the basis for a lawsuit "if the speaker does not genuinely and reasonably believe it or if it is without basis in fact."
But the MS and the agencies may still have another out here. Anybody who truly believed subprime MBS warranted AAA ratings clearly does not have the competency to stand trial.
Ratings Firms Lose Free-Speech Bid to Dismiss Lawsuit [Bloomberg]