Financial architects who design sexy death traps should be punished
If you bought a house and then it collapsed on top of you and your family, would you be mad?
What if you then learned that the architect colluded with the construction firm and the land owner to build a house that looked nice superficially but lacked essential features, like structural supports and a solid foundation?
What if you learned the house’s blueprints called for cheap, certain-to-fail materials?
What if you learned that the land owner paid the architect to help her/him market your house as a great house and the architect had praised your house as a “AAA” house?
Would you expect your architect to escape punishment?
Well, in the real world of financial architecture, the architects of toxic collateralized debt obligations (CDOs) — Moody’s and Standard & Poors — are escaping all punishment. They were sued on the accurate argument — made by lawyers David J. Graisand and Kostas D. Katsiris — that “the rating agencies are not journalists gathering information and reporting to the public, but rather participants in the transactions that they rate,” since they were paid by the sellers, negotiated the terms of their ratings with the sellers, and those ratings were essential to the CDOs' marketing to “naive” investors (like governments and pension funds silly enough to believe a “AAA” rating meant those investments were relatively safe).
So, how did the architects/marketers of toxic debt escape punishment? Here’s Judge Lewis Kaplan’s “reasoning”:
[The ratings agencies' role was] no different than those of an architect or a builder in designing and constructing a house…. While it doubtless is true that the architect or builder had a lot to do with the characteristics of the house — no doubt characteristics that made it an attractive and salable product — they cannot properly be said to have participated in any legally relevant sense in its resale down the line.
Some lawyers were outraged by the decision, saying that Judge Kaplan didn’t follow through with his analogy that ratings agencies were like architects: a homeowner can sue an architect for a design flaw if the house comes crashing down.
Posted by James on Tuesday, February 16, 2010