Morningstar's John Rekenthaler is none too amused at Standard & Poor's attempt to use the legal term "puffery" as a defense against allegations that they inflated ratings fixed-income securities. S&P's lawyers have argued that its statements about the fairness and objectivity of its ratings were not meant to be taken at face value by investors in the same vein that a pizza parlor can advertise "World's best pizza" without being challenged on its claim.

Needless to say, Rekenthaler thinks that is ridiculous, because S&P knows investment managers use credit ratings to make investment decisions, no matter what the managers say.

Investment managers don't want to admit to this because they figure clients pay them to do their own research and add more perspective, but they need credit agencies to evaluate investments:

Now that is true puffery. Few investment managers, if any, have enough research horsepower to conduct credit analysis on all the securities held by all its funds…It's savvy marketing for a fund manager to claim otherwise, because if a manager doesn't know more than a credit agency, then why pay fees for the fund's service? '

Rekenthaler also criticizes the VAR, Value at Risk, or the percentage chance of losing a dollar amount, that regulators created to improve comparability. The problem with the VAR, he argues, is that it's based on how past markets behaved, which isn't necessarily a true indicator of how future markets will behave.

To read more, click here. 

Edited by: Casey Quinlan


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