“..had a rating agency chosen to give companies lower scores based on the fact that they traded derivatives, currently known as toxic assets, I am very confident that there would have been a Court ruling forbidding such practice”.
Disagree, I don’t think it works that way, in fact I’m darn sure it doesn’t. In your specific example, a downgrade based upon an entity trading or holding derivatives is absolutely warranted by any standard of reasoning or practice.
As I understand it: If you are the issuer of a debt instrument, you HIRE (eg; pay a fee to) a Moody’s or Fitch or S&P to “rate” the creditworthiness of your offering, which is your effort to bolster the value of your offering by bolting a third-party so-called independent opinion to the prospectus for your offering. Not much different than paying for an appraisal on a piece of real estate you wish to take a mortgage on, whether to buy or to refi.
MBI and ABK were and are huge guarantors of all manner of tranches of debt; mortgage, consumer, municipal. Their insurance policies would be grafted onto debt offerings, bolstering the perceived values of those offerings by offering default insurance. Not one whit different than grafting a homeowner’s PMI policy onto his less-than-20% down-payment mortgage to improve the secondary market’s perception of the danger of default. When (I think it was) Moody’s downgraded MBI because of its ever-increasing exposure to exploding debt defaults far beyond its ability to pay claims, MBI had a hissy fit, and angrily just stopped paying for Moody’s ratings and went on their merry way. MBI didn’t sue Moody’s for libel or anything like that. Did the market care? No, short attention span theater.