Pension Funds, Dancing a Two-Step With Ratings Firms

By Gretchen Morgenson

Pension fund investors lost billions of dollars trusting the rosy credit ratings stamped on troubled mortgage securities before the 2008 crisis. In its aftermath, they have spent years and many dollars suing Moody’s and Standard & Poor’s, the main purveyors of those dubious grades.

That these funds and other plaintiffs are trying to hold the ratings agencies to account is a good thing.

And yet, there’s a mystifying disconnect in some of these disputes. On one hand, pension funds or state officials are telling the courts that Moody’s and S.&P. were negligent and their ratings marred by flawed methods and conflicts of interest. On the other hand, when the professionals who manage state funds buy bonds or mortgage securities, their investment policies require them to rely on the assessments of — you guessed it — the very same ratings agencies.