CalPERS headquarters in Sacramento
CalPERS headquarters in Sacramento - 
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Kai Ryssdal: If there's one thing we've learned from Wall Street the past two years, it is that not everything is as it seems. For instance, just because somebody says something's a good investment, doesn't always mean it is. The country's biggest public-pension fund learned that the hard way. The California Public Employees' Retirement System, or CalPERS, made some investments based on AAA ratings from the big credit-ratings agencies. It ultimately lost up to a billion dollars on the deal. Today, CalPERS sued those agencies for what it calls negligent misrepresentations. Our Senior Business Correspondent Bob Moon reports the defense will likely be that the raters have a First Amendment right to their opinions.

BOB MOON: This isn't the first lawsuit stemming from the financial meltdown, and the ratings agencies have consistently argued they offer only their opinions, not investment advice. They claim they're covered under free-speech protections.

Joseph Mason is a banking professor at Louisiana State University. He says that argument might apply if CalPERS and other pension funds were free to disregard these ratings as if they were an editorial opinion.

JOSEPH MASON: This is not a free market. By regulation, CalPERS can only purchase investments that are rated BBB or better, but the government regulations that require that don't define what BBB means, or what AAA means, for that matter.

Mason says, the agencies issue long disclaimers that say they're under no obligation to conduct investigations of any depth.

MASON: It's kind of like the government saying, "You have to buy this particular newspaper and abide by their opinions," but the newspaper has no responsibility whatsoever to report anything near the truth.

Still, management consultant and market commentator Peter Cohan says Calpers, itself, isn't blameless.

PETER COHAN: CalPERS, which presumably has professional investment analysts deciding where to put the money, apparently chose not to care what they were investing in. Instead what they decided to do was, "Oh, this is AAA rated? No problem, we'll buy it." They put $1.6 billion into it in 2006, and by 2008 the money was gone.

Because the rating agencies are paid by the very companies they rate, they've also been accused of a conflict of interest. But the Obama administration's recent regulatory overhaul recommendations didn't suggest any major changes in the ratings process.

I'm Bob Moon for Marketplace.

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