A rare phenomenon occurred in April. Two major credit rating agencies and Morgan Stanley & Co. agreed to settle litigation challenging the ratings of subprime investment products. (The amount of the settlement hasn’t been disclosed, but The Wall Street Journal has reported it as $225 million.) The settlements marked the first time the credit rating agencieswhich continue to deny any liability for their role in the financial crisisagreed to settle such a case. Something else was unusual, too. These cases, which involved two special investment vehicles called Cheyne and Rhinebridge, were set for trial in May and had moved far enough along in pretrial proceedings to allow the plaintiffs to reveal significant new details about the ratings process.
The investor plaintiffs’ court filings were packed with a string of damaging deposition testimony and emails from the defendants’ employees. For instance, Frank Parisi, Standard & Poors’s chief credit officer for structured finance, testified that the model used to analyze residential mortgagebacked securities in 2005 and 2006 was only marginally more accurate than "if you just simply flipped a coin." Before the Cheyne SIV was created, an S&P analyst wrote in an email: "I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it."
