The California Public Employees’ Retirement System (Calpers) is suing the three leading credit rating agencies over potential losses of more than $1bn related to structured investments (SIVs) that were rated AAA but contained risky mortgage debt.  Calpers manage US$ 173 in pension funds and are regarded as a ‘heavy weight’ in pension fund management.

The Calpers suit relates to $1.3bn of notes and commercial paper that was issued by three structured investment vehicles (SIVs) called Cheyne Finance LLC, Stanfield Victoria Funding and Sigma Finance and that the pension fund bought in 2006.

Calpers claims that the rating agencies went beyond rating the SIVs as they were involved in structuring them and rated them incompetently.  Calpers states that the SIV rating fees charged by rating agencies ranging from US$ 300,000 to US$ 1 million were contingent on the successful sale of the SIV securities.  That provided a motive to give the SIVs the highest rating.

All three rating agencies dismissed the allegations and have always prevailed against similar legal challenges before. however commented in its recent ‘Considered View’ that this time the rating agencies “may be forced to eat their own cooking,” if these allegations prove to be true.  If raters assisted in structuring SIVs it would undermine their assertion that ratings constitute opinions worthy of the same First Amendment protections afforded to journalist. 

Furthermore Calpers complains that it didn’t receive enough information from SIVs or the rating agencies to adequately comprehend the nature of the risk.  Here Calpers treads on ‘soft’ ground’ as it should not have bought what it could not understand.  Caveat Emptor.  Source:  FT and

BIIA Newsletter July – August 2009 Issue