Legal Briefing: How Much Will Misleading Ratings Cost the Big Banks?

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MBIA Suit Against Merrill Lynch over Misrated-AAA Securities Goes Forward

The ratings agencies aren't the only ones getting in trouble for AAA ratings on junk securities. MBIA Insurance (MBI) sued Merrill Lynch (BAC) in part because the Collateral Debt Obligations (CDOs) on which Merrill bought Credit Default Swaps (CDSs, essentially insurance) from MBIA were AAA-rated junk rather than true top level investment-grade securities.

The contract between Merrill and MBIA required the CDOs being insured to be rated AAA. Merrill said, in essence: Look, they were -- you can see AAA all over the documents. MBIA's stance, in essence, is: The AAA on those securities was an empty label, not an accurate reflection of the securities' credit worthiness, and the contract entitled us to securities deserving of a AAA rating, not securities merely rubber-stamped AAA. Moreover, said MBIA, Merrill knew the underlying CDOs didn't deserve the AAA rating at the time Merrill bought the CDSs from MBIA.

On Apr. 9, Judge Bernard Fried dismissed all of MBIA's other claims, but he let this one go forward. If MBIA wins at trial on this theory, all the big banks will surely face similar claims. The claim might seem unjust if the ratings agencies had really been independent of the banks, and thus the latter had had no influence on the ratings. But emails, documents and recent Congressional testimony show the banks knew they needed AAA ratings to sell securities and apparently shopped around for favorable ratings until they got them. So this kind of claim seems to me to be a very appropriate way to share the blame.

We're a long way from knowing how this or other cases play out, but it could get very expensive for the banks. They insured an awful lot of AAA-rated junk.

$12,600 to Not Read a Contract

Bloomberg reports that the Lehman Brothers Holdings trustee charged $12,600 to read a contract and related documents, but then admitted in court that he hadn't read the final, signed version, simply earlier drafts -- and so hadn't noticed a new provision that gave Barclays (BCS) $4 billion more. Ouch.

And in the Business of Law...

The Wall Street Journal has a nice overview of how lousy the job market is for new law school graduates. Bottom line: Don't go to law school without a full scholarship or a rich uncle paying your way. In today's job market, there's very little chance you'll be able to repay the $100,000+ debt you'll rack up going on loans.