Calpers Sues Bond Ratings Agencies

Roundly vilified for their role in the financial crisis, the credit-ratings agencies are now the subject of a dose of revenge.

The California Public Employees' Retirement System, or Calpers, one of the country's biggest and most visible institutional investors, has sued the three agencies -- Moody's, Standard & Poor's (owned by McGraw-Hill(MHP Quote)) and Fitch Ratings -- essentially alleging malfeasance.

In a suit filed Tuesday in California Superior Court in San Francisco, Calpers says the agencies gave their most gold-plated imprimatur to what eventually turned into junk, in all senses of that word: the so-called "structured investment vehicles," those enormous baskets of diseased assets such as subprime mortgages that were securitized and sold to investors, spreading the virus that eventually grew into a pandemic, seriously damaging such behemoth institutions as Bank of America(BACl Quote), Citigroup(Cl Quote) and AIG(AIG Quote).

Though Calpers didn't put a number on the damages it's seeking in the suit, the fund said it bought three SIVs in 2006, spending $1.3 billion on them before they collapsed in value last year.

(Click here to see Calpers' complaintagainst the credit-ratings agencies.)

Calpers, which manages the pensions of about 1.6 million retired California public servants, alleges that the agencies were culpable in that collapse, since the SIVs were so complex and "opaque" that only the agencies and the firms who created the securities truly knew what assets they contained.

In the suit, Calpers said Moody's, S&P and Fitch "gave the SIVs purchased by Calpers their highest credit ratings, and by doing so made negligent misrepresentations to Calpers and Calpers' money manager agents, which have caused and will cause Calpers to suffer substantial investment losses."