Sometimes litigation throws such weird light on business and human affairs that it’s best to view the proceedings as ironic commentary on the underlying issues, rather than a rational search for truth, let alone justice. Such is the case with Standard & Poor’s defense against the federal government’s $5 billion fraud lawsuit.
The Justice Department, as you’ll recall, has accused S&P (MHFI) of helping cause the 2008 financial crash by inflating its ratings of esoteric subprime-backed securities. The company’s purported motive: pleasing the investment banks that pay its fees. The rating agency’s first line of defense was that it couldn’t be held liable for its claims of integrity because no sensible investor would believe its “AAA” rubber stamp.
In July, a federal judge in Santa Ana, Calif., brusquely rejected S&P’s “mere puffery” defense. If one read between the lines of his ruling, U.S. District Judge David Carter seemed incredulous that a company that bases its reputation on independent judgment would maintain with a straight face that it’s immune from legal consequences because no one takes its judgment seriously. “If no investor believed in S&P’s objectivity,” the judge wrote, “is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?” It seemed like something from the theater of the absurd….