S&P Claims US Fraud Case Is Punishment, Seeks Conversation Records

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Standard & Poor’s, the only ratings agency charged by the US government with fraud over its ratings of mortgage-backed securities that ultimately imploded the economy in 2008, is seeking records of conversations that took place between then Treasury Secretary Timothy Geithner and President Barack Obama to bolster claims that the government is punishing S&P for its historic downgrade of US government debt in 2011.

In the spring of 2011, those closely watching the US debt crisis, hedge fund managers among them, had their eyes keenly focused on negotiations between Republicans and Democrats to determine the potential for a political compromise to bring down the ever-spiraling US government budget deficit.  When political leaders failed to compromise, it was a signal to many inside the financial community that the deficit spending would continue, implying additional risk in bond prices.  This is when S&P issued its first downgrade of US government debt, which infuriated government officials.

According to court documents, soon after a meeting with the Obama on August 8, Geithner personally called Harold W. McGraw III, the chairman of McGraw Hill Financial, to “express his displeasure with the downgrade” is one description of the call.  Another description is that Geithner was irate and raised his voice on several occasions in what can be described as more of a lecture than a conversation.  According to court documents unearthed in a New York Times report, in the phone conversation Geithner told McGraw that the behavior of S&P would be “looked at very carefully,” the implication being drawn is their firm would receive additional scrutiny.

Only one ratings agency targeted with fraud charges

While the three major ratings agencies – Moody’s Corporation (NYSE:MCO), Fitch and S&P – all rated the toxic mortgage-backed securities as being of high quality, only S&P has been targeted by the Department of Justice for fraud.

Previously the government called the notion the Department of Justice would alter an investigation for political purposes as “preposterous.”  Reinforcing this position, a Justice Department spokeswoman yesterday said there was no connection between the lawsuit and the downgrade. “The department’s investigation into S&P began in November of 2009, long before S.&P.’s decision to downgrade the US credit rating,” Ellen Canale said in an emailed statement to the New York Times.

From IRS to Lanny Breuer, history of investigative manipulation

While the DoJ claims that an investigation for political targeting is “preposterous,” the claim is not without basis.  Political targeting in the IRS is currently an issue.  Further, the DoJ has a documented history of not investigating select large financial firms associated with the 2008 mortgage crisis.  In a 60 Minutes report, it was revealed that whistleblowers with evidence of fraud, including Countrywide’s chief fraud investigator, were never questioned by the DoJ’s Criminal Division, which was then led by Lanny Breuer.  Then in a landmark Frontline interview, Breuer admitted that the DoJ did not investigate certain banks or their individual employees for fraud in the 2008 mortgage-backed securities scandal.  He resigned from office days later.  Charges the DoJ did not properly investigate the illegal asset transfers at MF Global persist.

In its latest court filing, S&P is seeking all documents, transcripts and notes surrounding the meetings and discussions that took place relative to the downgrade of US debt, including a preview of Geithner’s forthcoming book, Stress Test.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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