Connecticut has two lawsuits pending against debt rating agencies
The nation may just be learning about the power wielded by credit rating agencies, but Connecticut officials have been scrutinizing Standard and Poor's and its two major rivals in the bond market for a few years.
"The United States losing its AAA bond rating for the first time focused the federal government, Congresspeople and senators on the power that rating agencies hold over government," Jim Finley, head of the Connecticut Conference of Municipalities, said about the recent S&P downgrade of the nation's debt outlook.
The state has two lawsuits pending against S&P, Fitch and Moody's, the trio of rating titans. The suits were filed by Democratic Attorney General-turned-U.S. Sen. Richard Blumenthal.
Although the cases are moving forward, current Attorney General George Jepsen has recused himself from direct involvement because his previous law firm represented S&P.
While some lawmakers, political pundits and economic gurus spent the past week questioning S&P's credibility, Blumenthal Friday said he has long harbored doubts about the fairness, independence and functionality of the bond rating system.
"I only wish the courts moved more quickly and more effectively, because the story that we tell in these lawsuits, obviously, has powerful meaning for our present economic moment," Blumenthal said.
Blumenthal, with CCM's support, in 2008 brought S&P, Fitch and Moody's to court, alleging they intentionally assigned lower credit ratings to bonds issued by public entities, forcing cities and towns to pay higher interest rates or purchase bond insurance.
Moody's and Fitch, which is partly owned by the Hearst Corp., owner of Hearst Connecticut Newspapers, have since made some changes. An S&P spokesman was unable to comment Friday.
Last year, prior to his election to Senate, Blumenthal targeted S&P and Moody's for allegedly violating the Connecticut Unfair Trade Practices Act.
He claimed the agencies portrayed themselves as objective, but steered insurance companies, mutual, hedge and pension funds to certain investment vehicles based on personal interest.
The two agencies at the time said Blumenthal's case lacked merit and they expected to prevail.
Alan Schankel, director of fixed income research for Philadelphia-based Janney Montgomery Scott financial services, said the ratings agencies arose around 1900, focusing on railroad bonds and eventually moving on to municipal debt.
Schankel said while smaller ratings agencies exist, "I think it's probably true these three (S&P, Fitch, Moody's) basically control the market."
It is no secret that local and state officials jump through hoops to try and maintain higher bond ratings granted by S&P, Fitch and Moody's. "It comes down to interest costs," said Schankel.
In other words, the better the rating, the less taxpayer dollars are spent on interest governments pay when they borrow to fund big-ticket projects.
"It's also psychological. Bragging rights," said Schankel, who added he thought the agencies do a "reasonably good job" on their municipal bond ratings. "The U.S. downgrade -- it's doubtful it's cost the U.S. much in interest, but it sure was a black mark and embarrassment."
On Thursday, Bridgeport Mayor Bill Finch, a Democrat who is facing a tough primary battle, proudly announced Fitch had displayed its confidence in the state's largest city by reaffirming Bridgeport's "A" bond rating. In contrast, Fitch's decision in 2010 to remove the "+" from Connecticut's AA+ rating had gubernatorial candidates pointing fingers at incumbent lawmakers and positioning themselves as the most qualified to stabilize the state's finances.
Finley said municipalities believe they are unfairly held captive by the current bond rating system. "There's a sense of powerlessness over the fact you essentially have a monopoly from these agencies in giving a thumbs up or down or in the middle to a community," he said.
"They sort of have this ability to unilaterally wield power that has a dramatic impact over every American in the U.S."
Officials in Westport and Fairfield, both of which enjoy AAA ratings from Moody's, expressed dismay and bafflement when the rating company downgraded their longer-term outlook from stable to negative.
Blumenthal hoped the current focus in Washington on S&P would help shake up the playing field and lead to an increase in the number of rating agencies.
"They keep us honest," he said. "Nobody likes to hear the unvarnished truth because they take a dispassionate look at reality. Politicians tend to sugarcoat things. There needs to be somebody in the world that tells it like it is."
Staff Writer Brian Lockhart can be reached at email@example.com