The Justice Department is about to put the squeeze on the Standard & Poor's credit rating service for the tune of $1billion, roughly its 2014 profit, and a fine meant to send a message, according to a Jan. 12 report in The New York Times.
The message: Do not tangle with the Obama administration.
The charge: Standards & Poor's analysts misrepresented their sincere opinion of securities, and instead downplayed the amount of risk associated with the securities, specifically Residential Mortgage-Back Securities and Collateral Debt Obligations, in order to ingratiate themselves to the companies issuing the securities.
This charge, which Attorney Eric H. Holder Jr., made Feb. 5, 2013, was completely over-the-top, but we are talking about a $1 billion fine and sticking someone with blame for the 2008 financial crisis.
“Today’s action is an important step forward in our ongoing efforts to investigate – and – punish the conduct that is believed to have contributed to the worst economic crisis in recent history,” Holder said.
Driving the civil action against Standard & Poor's is Stuart F. Delery, the acting assistant attorney general. Delery is the attorney behind the crusade forcing the Boy Scouts of America to welcome homosexuals as both scouts and scout leaders. It made Delery a celebrity lawyer in left-wing legal circles.
The basic DOJ narrative is that because a company hires S&P to rate its products, S&P has an incentive to tilt its analysis in favor of the company and its products. Investors, fooled by S&P's sunny-day analysis, lost money with the securities went south.
Frankly, this narrative is foolish. There is no incentive for a rating agency to be wrong about the risk associated with securities—regardless of whatever emails some idiots sent to each other stating otherwise.
First, what good is the rating from a rating company that it is always wrong?
Second, if the system, where companies pay to have their products rated was prone to abuse, would not everyone get the coveted Triple-A?
The real story, of course, is not about knuckleheads throwing money into a campfire on the say-so of devious S&P analysts, triggering the worst financial crisis since the Great Depression.
The real story is that Standard & Poor's, two days after President Barack Obama signed the Budget Control Act of 2011, downgraded debt issued from the U.S. Treasury from AAA to AA+.
In court filings, people at S&P claimed that then-Treasury Secretary Timothy F. Geithner communicated to them that they would be punished. Until Holder lined up his charges, the rating firm was just waiting for the other show to drop.
The Budget Control Act of 2011 was born of one in a series of standoffs between Capitol Hill Republicans and the president. The act immediately raised the debt ceiling by $400 billion and gave the president authority to raise the debt ceiling another $1.2 trillion.
The BCA was expected to reduced increases in the federal debt by $4 trillion over 10 years, but instead the number was closer to $2.4 trillion.
S&P said it was not impressed.
“We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process,” S&P said in its statement.
This was not a small deal. It was a big deal. In the financial services industry, Treasury debt was and is recognized as the most secure securities available.
Besides being theoretically risk-free, as a practical matter, many organizations, foundations, trusts and other vehicles are required to invest in AAA-rated instruments. The easiest was to meet this requirement is to invest in treasuries, which suddenly had to be dumped to meet fiduciary standards.
For the record: The day Obama signed the Budget Control Act of 2011, federal debt stood at $14.5 trillion, 93 percent of Gross Domestic Product, which is the annual measure of the size of the American economy. On Jan. 15 at $18 trillion, 101 percent of GDP.
Clearly, Obama is more interested in controlling dissent, not the size of federal debt.
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