“That deal is ridiculous,” one analyst said, adding “We should not be rating it.”

“We rate every deal,” the second analyst replied.

“It could be structured by cows and we would rate it,” the first analyst replied.

Bloomberg-

Moody’s Corp. (MCO) and Standard & Poor’s lost a bid for dismissal of fraud claims in a suit by investors claiming the companies falsely assigned inflated ratings to notes sold by Morgan Stanley (MS) that were backed by subprime mortgages.

U.S. District Judge Shira Scheindlin yesterday declined a request to throw out fraud claims against the two rating companies and a claim of aiding and abetting fraud against Morgan Stanley. Scheindlin narrowed the suit, dismissing claims by three of the 15 plaintiffs.

Scheindlin also dismissed the investors’ fraud claims against the bank and aiding-and-abetting claims against the rating companies, ruling that it was the rating companies, not Morgan Stanley, that issued the ratings.

The suit was filed in 2008 by institutional investors including Abu Dhabi Commercial Bank, based in the United Arab Emirates, and Washington’s King County, which includes Seattle, in a structured investment vehicle named Cheyne. The investors claim Morgan Stanley pressured the rating companies to give erroneous investment-grade ratings to the notes.

[BLOOMBERG]

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