I need help understanding why does US legal system affords journalistic protection of free speech to credit rating agencies (CRA), especially those which rated mortgage backed securities (MBS) and were heavily involved in the global financial crisis of 2008. I could buy that story if CRAs were publishing their unsolicited opinions on their web-site. But what CRA actually did regarding rating of MBS was solicited and paid expertize that did not only express opinion of future performance of the product, but also actively participate in the design of the product (example, see Levin report p. 287[1])

On another occasion in March 2007, a Moody’s analyst emailed a colleague about problems she was having with someone at Deutsche Bank after Moody’s suggested adjustments to the deal: “[The Deutsche Bank investment banker] is pushing back dearly saying that the deal has been marketed already and that we came back ‘too late’ with this discovery .… She claims it’s hard for them to change the structure at this point.

(emphasis mine)

That is not what journalists do but more akin to, let say, if I hire a civil engineering firm to design me a bridge. Construction firm observes the project to the letter and builds me one. But the design is so bad that bridge collapses with the very first wind. Why can’t they say - hey, it was only our 1st Amendment protected opinion that the bridge can hold its own weight and function as a traffic infrastructure, holding us responsible if it didn’t would be a denial of the freedom of speech.

On the other hand, CRAs did just that. They inspected the product and gave it highest rating available. Investors would pour money and security would fail a few months later, but it seems that CRAs hold court tested immunity for whatever they say. It should also be noted that these securities were failing for intrinsic reasons - simply , teaser rates ran out for underline obligations or they were unable to refinance or documentation was so lacking that proper assessment could not be made, but that can not exonerate CRAs as all those information was available at the time of rating.

So what is the key legal difference that distinguishes CRA and all other professionals that are actually responsible for their work?

[1] Wall Street and Financial Crisis: Anatomy of a Financial Crisis, US Senat PSI

  • Where exactly do you get the idea that this was a free speech issue...? – Stackstuck Mar 9 '18 at 9:02
  • Credit Rating Agencies: Self-regulation, Statutory Regulation and Case Law ... by Mohammed Hemraj, section 6.7.1. where is claimed: "The CRA First Amendment will continue to remain CRAs' core defence in the US as Congress is barred from curtailing freedom of speech, or freedom of the press.". There is a copy in Google Books goo.gl/vdJx5b – Stipe Galić Mar 9 '18 at 9:45
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    What responsibility do you think they have? Do you believe there is a criminal statute they have violated, or are you wondering why no one has gone after them for civil damages? It would help if you specify which action you believe should be taken which has not been taken. – IllusiveBrian Mar 9 '18 at 22:01
  • @IllusiveBrian Follow-up googling showed that several civil cases against CRAs were raised and that First Amendment was not as solid defense as once were but is still their go-to move when sued. As far I can tell most of these cases get settled and verdict on 1stA defense is seldom delivered. As for your question, I'm going to argue below that solicited, for profit, expert advisory on specific subject should not be afforded same protection as journalistic speech. To my mind, there should be SEC enforced regulation in place regarding CRAs. – Stipe Galić Mar 11 '18 at 9:35
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    You say that CRAs have claimed First Amendment protection as a defense, but has that defense ever been sustained in a judicial ruling? I.e., is there any law establishing that they have immunity? Entities can claim all sorts of immunity; that doesn't mean they have it. As I understand: following the 2008 crisis there was a great deal of (extra-judicial) renegotiation of the role and terms under which CRAs can act, and one would have to scrutinize the settlements and regulatory changes to find what law was in fact accepted and applied. – feetwet Mar 11 '18 at 16:39

Why does the US afford First Amendment protection to CRAs? Because it can not legally do otherwise.

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Freedom of speech is not absolute -- it has a couple of limitations from common law. (You can't commit fraud or perjury, for example.) But it's pretty damn close. This isn't some special protection offered to CRAs -- every person in the US has it -- and limitations on what anyone can report would infringe the First Amendment.

What makes CRAs different from you or me is that they use that freedom. They depend on it. They need it, for all of the same reasons journalists need it -- it is precisely their job to say things that certain people might not want said.

The key difference between CRAs and journalists is that a credit rating is not a statement of fact. It is one company's opinion of the subject's ability to meet future obligations. A "forward-looking statement" (ie: prediction) is inherently a statement of opinion; it literally can not be false at the time it is made (as there isn't even any way to prove or disprove the proposed future until the actual future has happened). And the First Amendment arguably protects opinions more than any other type of expression.

(Now, if "their opinion" was based on an unreported conflict of interest, then they might be liable (and probably in violation of SEC regulations as well). But absent that, you can't be sued just for having stupid opinions.)

Your bridge builders and architects don't get that protection because bridge building isn't speech. The First Amendment might protect the process and the bridge inasmuch as they can be considered "expression", but no further. And since that bridge will presumably be used by the public, the government has a vested interest in not letting you create a death trap.

  • Thanks for responding, I'll give a quick follow-up in an answer. – Stipe Galić Mar 11 '18 at 9:36
  • That's not what answers are for, so your reply is likely to get deleted. I've copied it, and will address in more detail later. But architects don't just draw pics -- in designing for someone who wants a particular type of structure, they imply that the structure is fit for that purpose. (They might even have to explicitly certify that; i'm not an architect, so i don't know how that all works.) But the soundness of the design can be verified by physics equations. If those equations show it's unsound, then the architect has not done the job they were contracted, and thus legally bound, to do. – cHao Mar 11 '18 at 18:14
  • I wasn't aware I crossed the line, I'd delete it myself but it seems I don't have delete button available. – Stipe Galić Mar 11 '18 at 21:25
  • I tried to delete it but it only changed color. – Stipe Galić Mar 11 '18 at 21:26
  • Yeah, it'll get a colored background. You can still see your own deleted answers, but others can't. – cHao Mar 11 '18 at 21:35

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