Business Opinion: One of the few certainties amid the fallout from the current market volatility is that lawsuits are likely to follow. In a litigious age, personal responsibility rarely intrudes on the desire to find a scapegoat for decisions that go wrong.
The finger of blame has been pointed widely in the past 10 days, with everyone from secretive hedge funds to over-exposed German banks and from US homebuyers who lied about their finances to the lenders who turned a blind eye to the practice being cited. The target, generally, has depended on the position of the person doing the pointing.
Already, there are mutterings in the market about the eventual cost of the turmoil to individual financial institutions - both in terms of reputation and of compensation to aggrieved investors.
One of the first casualties was Irish banker Edward Cahill. Cahill was European head of collateralised debt obligations at Barclays Capital, which has been to the fore in putting together structured investment vehicles, a number of which have been among the hardest hit investments in the recent reduction in liquidity in the financial markets. Cahill resigned from Barclays two weeks ago.
More significantly, perhaps, is the prospect of action against the agencies that rate the creditworthiness of these increasingly arcane financial instruments which account these days for a growing share of the market.
As one Dublin wealth manager noted last week, the agencies will have some way to go in explaining how institutions offering asset securities backed in part with junk-rated debt or subprime mortgage lending managed to secure triple-A ratings.
The role and power of the ratings agencies was illustrated this week when Dublin-based fund Cheyne Finance saw its rating slashed by a full six notches from triple-A grade. The $6.6 billion (€4.84 billion) Dublin operation of a British hedge fund operation called Cheyne Capital subsequently announced that it was being forced to sell assets.
While Cheyne's directors this weekend expressed confidence that it would survive - largely because its investors are big institutions more understanding of market volatility - the value of the investment will be worth significantly less than $6.6 billion when the dust settles.
This weekend, Kathleen Corbet, president of Standard & Poor's (S&P), left her post. Few are taking any note of the rating agency's assertion that her move is unrelated to what is happening in the market and is simply to allow her to pursue other opportunities and spend more time with her family.
As the number of investment options proliferates and less sophisticated investors dabble more extensively in areas they do not fully understand, ratings given by the likes of S&P, Moody's and Fitch assume a greater significance.
German chancellor Angela Merkel on Thursday joined French president Nicolas Sarkozy and the European Commission in their calls for rating agencies to be more closely scrutinised alongside other market participants in the wake of the fall-out of recent weeks.
US Senate banking committee chairman Christopher Dodd has also called for an investigation of the role of ratings agencies in valuing mortgage-backed securities, saying that credit rating companies must explain why they assigned "triple-A ratings to securities that never deserved them".
Writing in the Wall Street Journal at the weekend, Vickie Tillman, executive vice-president of credit market services at S&P, argued that it was unfair to blame the ratings agencies for the subprime losses. "Our ratings are based on the facts available to us at the time these opinions are made," the S&P executive added.
That is so, but the mushrooming threat posed by the US subprime mortgage crisis has been known for some time and it is largely the presence of this type of debt in bundled "securitised" investments that has triggered the market jitters.
The agencies' sudden and belated move to downgrade some of this debt - in one case hitting a fund with a 17-notch decline - has undermined confidence both in their performance and in that of the funds to which they assign ratings.
Analysts note that credit rating agencies have a vested interest in creating new markets for the sort of products at the centre of the current storm because they charge a fee for the ratings they offer.
It is that practice, the analysts say, that has left them open to a raft of lawsuits from investors who have lost money on investments which the agencies rated.
