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.
