Turkish firms might bring lawsuit against S&P, Fitch

"If we don't give them the ratings, they will go to Moody's, right down the block. If we don't work with them, they will go to our competitors, not our fault, it is simply the way world works," says a Standard and Poor's (S&P) official in a short scene of the Oscar-winning film, The Big Short (2015). This short scene reveals the harsh reality that triggered the 2008 Financial Crisis, which echoed around the world. It is the reality of a system that works on capitalizing from the bubbles, which was basically giving triple A notes to subprime bonds despite their deteriorating loans.

Late Friday, U.S-based credit rating agency Fitch downgraded Turkey's long-term foreign currency issuer default rating from BBB- to BB+, also cutting ratings on the country's senior, unsecured foreign currency bonds from BBB- to BB+. Despite the widely contested nature of the Fitch decision, Standard & Poor's (S&P) decision to downgrade Turkey's outlook from "stable" to "negative" late Friday sent shock waves across the investment community, while S&P did not change Turkey's credit rating, which stands at BB.

Turkish government officials and business people opined that the decisions by S&P and Fitch would not have a long-term impact on Turkish markets, stressing the political influences marking these decisions. Officials claim that the macroeconomic data of the country provides no legitimate grounds for the downgrading decisions. After a wave of statements from analysts and political authorities questioning the credibility of the decisions of these "big three" of the market, another issue was raised. The simple question of whether Turkish firms can bring compensation lawsuits against S&P and Fitch was brought to the fore. If a Turkish firm suffers losses due to a foreign investor presumably with equity in that Turkish firm, withdraws its investments in Turkey, the said Turkish firm might bring a case for damages incurred, claims Prof. Dr. Erol Ulusoy in his column at Milliyet daily.

After the 2008 financial crisis that swayed the world, the issue of holding credit rating agencies accountable for deeds was a motive for a series of suits brought against them. For instance, in 2013, liquidators seeking to recover money for investors in the funds filed a fraud lawsuit against S&P, Fitch Ratings and Moody's Investors Service, which artificially assigned high credit ratings to junk mortgage bonds in funds. When these bonds collapsed, the funds failed, causing an enormous number of investor losses.

In February 2015, S&P secured a settlement with the U.S. to pay a fine of $1.5 billion. The credit rating agency resolved a collection of lawsuits over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis, concluding one of the U.S. government's most ambitious cases tied to the housing collapse. In October 2016, the U.S. Department of Justice is reported to have filed a civil complaint against Moody's for the rating of residential mortgages that led to 2008 financial crisis and for violating the Financial Institutions Reform, Recovery, and Enforcement Act. As it is obvious, the actions of these rating agencies that played a major role in the 2008 meltdown still linger over them.

In the U.S., there is legislative ground to sue these rating agencies. The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank, which was signed into federal law by then-President Barack Obama, aims to pass reforms that seek reliance on ratings as a benchmark for credit quality. What is striking in the act is its provision stipulating that the act will greatly expand the SEC's oversight and enforcement powers while seeking to make it easier for investors to bring civil lawsuits against rating agencies. To put it in more explicit terms, the act allows companies and investors to bring civil lawsuits against rating agencies which exercise great power over the countries and companies worldwide. Not only did the official U.S. authorities file suits against these rating agencies but other countries also brought up lawsuits. In 2012, an Australian court ruled that S&P misled investors by awarding triple A ratings to complex derivatives that later collapsed in value. In fact, this ruling paved the way for similar court actions to possibly be taken elsewhere from investors who lost billions of dollars because of the decisions made by "the big three," which are all U.S.-based credit rating agencies.

In 2015, a court in the city of Trani in southern Italy filed lawsuits against S&P and Fitch, alongside five of their employees who are accused of inflicting unjustified damage on the Italian economy for their role in credit rating decisions made in 2011 and 2012. Moreover, ECB Chair Mario Draghi was listed among the witnesses to testify at trial, in addition to Italian Economy Minister Carlo Padoan and former Prime Minister Mario Monti.

Since the 2008 Crisis, both the U.S. and the EU have tried to bring regulatory legislation and various other measures to monitor the actions of these agencies. However, it is the system that fails countries and investors. There is no alternative to these "big three agencies" in the entire global rating system.

Speaking to Daily Sabah, Prof. Dr. Vedat Akgiray from Boğaziçi University and former Capital Market Board (SPK) chair also draws attention to the systemic problems and the failure to create a more regulatory alternative rating system. When asked about the possibility of bringing a lawsuit against these agencies, Akgiray states that lawsuits for damages incurred because of the decisions of these rating agencies could be brought by Turkish firms, pointing out that such a suit is an important reaction in response as it raises questions on the reliance of the ratings given by these agencies.

Although the lawsuit might not result in a legally binding verdict, such cases would point out the moral hazard the agencies bear. In addition to exercising a monopoly over the rating system, these institutions base their decisions on subjective assessments, Akgiray noted. Even though a whole body of mathematical reports and data is prepared, the rating decisions are taken in accordance with the subjective evaluations of a number of committee members at these credit rating agencies, the professor said.

Although it is unclear, asking the question whether these "big three" could be sued or not is an issue to ponder on while weighing their credibility and seeking alternative ways for better regulated and more accountable rating systems.