Rough Waters for the Ratings Companies: Should the Securities Ratings Companies Be Held Liable for Investor Reliance in the Wake of the Real Estate Meltdown of 2007-2008?

Abstract

In the wake of the Real Estate market meltdown and the "Great Recession" that followed, this note focuses on whether securities ratings companies, such as Standard & Poor’s, Fitch, and Moody’s, should be held liable to the investors of residential mortgage backed securities (also referred to as “RMBS”). These investors relied on the ratings only to have the value of those securities decrease significantly due to real estate market downturn and subsequent re-rating of those securities by the ratings companies. The focus of this analysis will be on the liability of the securities ratings companies under both contract and tort theories. Specifically, the potential liability will be analyzed under the doctrine of promissory estoppel in contracts and under an extension of negligence and products liability theories in torts.