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Banking System's Credibility in Jeopardy

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The recent decision against Moody's and S&P confirms that transparency isn't helping.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.


Yesterday, US District Judge Shira Scheindlin rejected arguments by Moody's Investors Service (MCO) and Standard & Poor's, leaving them -- along with Morgan Stanley (MS) -- to defend against fraud charges in a class-action lawsuit that alleges they hid the risks of an investment linked to subprime mortgages.

Moody's and Standard & Poor's had argued (as they have forever) that investors can't sue over deceptive ratings of private-placement notes because those opinions are protected by
free-speech rights.

From my perspective, this now represents the third major decision by a Federal judge aimed at historically "acceptable" practices in the financial services space -- the other two relate to Bank of America's (BAC) disclosure around its Merrill Lynch acquisition and the Federal Reserve's disclosure of firms borrowing under the Emergency Credit Facility.

As funny as this may sound, I can't help but wonder whether the greatest challenge to our economic recovery is the judicial branch's continued probe for greater and greater transparency of the business practices of the financial services industry.

After Enron, Joe Sixpack was told that Sarbanes-Oxley would make the world a safer place. Unfortunately, while SOX created a higher standard for the reporting of results, it would appear that it did little to alter how those results were generated.

As much as it saddens me to say this, I fear that the more the general public becomes aware of the standard operating procedures of many large financial firms (along with their associated lawyers, accountants, lobbyists, regulators, etc.), the less credible our banking system is likely to become.

How we handle the truth remains to be seen.
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