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Special Report
Payback Time
A vindictive Obama administration is going after not only Standard & Poors for daring to downgrade the U.S. credit rating.
Why not Moody’s? Why not Fitch? Of all the questions raised by the U.S. government’s strange case against Standard & Poor’s — a lawsuit that actually asserts that some of the nation’s largest banks were S&P’s “victims,” and that the credit rating firm somehow fooled these banks about products the banks actually created — the lack of similar actions against S&P competitors still rings the most alarm bells.
S&P, Fitch and Moody’s all gave AAA rating to many packages of subprime mortgages that imploded. But of those three, only S&P downgraded the U.S. government from its decades-old AAA credit rating.
Floyd Abrams, the attorney representing S&P’s parent company McGraw-Hill in the litigation and a veteran First Amendment lawyer (and yes, the First Amendment is a strong concern here, as I will get to in a second), has said that the government ramped up its investigation of S&P shortly after the downgrade in 2011. “Is it true that after the downgrade the intensity of this investigation significantly increased? Yeah,” Floyd Abrams, S&P’s lead attorney, told CNBC in an interview last week. “We don’t know why.”
As Matthew Melchiorre and I wrote in TAS at the time, S&P’s reasoning in downgrading the U.S. was somewhat flawed. It repeated the standard litany about gridlock and implied support for some tax hikes. Nevertheless, it hammered the Obama administration on the skyrocketing levels of spending and debt. And now the administration seems to be sending a “no more hammering — even with a soft tip” message to S&P and its rivals, including even much smaller competitors.
Consider this. Just a few weeks ago before the Justice Department filed its civil suit against S&P, another arm of the federal leviathan attacked a small, upstart credit rating firm that also had the temerity to downgrade the U.S. In late January, the Securities and Exchange Commission (SEC) stripped rating agency Egan-Jones of its accreditation as a “nationally recognized statistical rating organization” (NRSRO) in rating the creditworthiness of government or asset-backed securities. This was the first time the SEC had ever stripped a rating agency of its NRSRO status, an action that effectively bars financial institutions from relying on the rating agency to meet capital requirements.
Ironically, Egan-Jones’ rating had been widely praised as an alternative to that of the “Big 3″ of Moody’s, Fitch and S&P. Receiving its funding through investor subscriptions, rather than payment of the entities being rated, it avoided the conflicts of interest that “Big 3″ critics say led to inflated ratings for mortgage securities. The firm also turned out to be prescient in its early downgrades of Bear Stearns and Lehman Brothers, the first institutions to implode in the mortgage crisis.
Egan-Jones also beat S&P to the punch in downgrading the U.S. In July 2011, a month before the S&P downgrade, Egan-Jones changed its rating from AAA to AA+. And it unambiguously hit government spending.
The firm explained: “The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP.” A few weeks later in early August, S&P would follow suit with its downgrade.
The SEC did not charge Egan-Jones with deceiving investors, but with the relatively trivial offense of misstating its length of time rating securities. The firm had said it had been rating securities since 1995, and it had. But according to Reuters, the SEC is going after the firm because its ratings had not been posted “on the internet or through another readily accessible means.” Never mind that the Internet was just beginning in 1995!
Looking at the actions against both Egan-Jones and S&P, Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, maintains that “the Obama Administration is sending a loud and clear message to Wall Street: mess with the bull and get the horns.” Schiff, who loudly warned during the housing boom of declining home prices and skyrocketing mortgage defaults, says “at most, S&P was guilty of a culture of complacency and group think.”
If that were a crime, everyone who gave rosy assessments of the housing market — from Federal Reserve Chairman Ben Bernanke to former House Financial Services Committee Chairman Barney Frank (D-Mass.) — would be in jail. And then there’s the inconvenient fact that the government itself was a key player in the mortgage crisis through “affordable housing” mandates and subsidies from Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Community Reinvestment Act. And as the American Enterprise Institute’s Peter Wallison makes clear in his new book, Bad History, Worse Policy, Fannie and Freddie misled the entire financial community — including presumably S&P — by misclassifying millions of loans made to borrowers with subprime credit scores as “prime.”
Prosecuting a false opinion or false prediction also raises serious First Amendment concerns. That’s why S&P has retained Abrams, who has argued other famous free speech cases for controversial causes, such as the right of the New York Times to publish classified military information in the “Pentagon Papers” case.
To sidestep free speech issues, the government is attempting to argue outright fraud and prove S&P didn’t believe in the ratings it issued. To do this, it presents selective quotes in emails from company employees who were housing market skeptics. But as Schiff points out, “the company readily admits that it reached its opinions through a consensus and that feelings within the firm varied.”
And the lawsuit, which pursues S&P with a bank fraud statute, actually accuses S&P of duping the very banks that created the securities. As described by moderate Bloomberg columnist Jonathan Weil, ”According to the government, Citigroup was defrauded by S&P credit ratings on subprime mortgage bonds that Citigroup itself created and sold. Bank of America, too, allegedly was defrauded by S&P in the same way.”
As Schiff notes, the credit ratings agencies’ power over the economy was “engendered by the bizarre regulatory environment created for ratings agencies by the government itself.” In 1975, the SEC created the designation of NRSRO for credit-rating firms. Regulatory agencies soon began requiring that banks, brokerage firms, pensions, and insurance companies carry mandated levels of securities rated AAA from an SEC-approved NRSRO.
About the Author
John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute and blogs at OpenMarket.org.
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Appleby| 2.14.13 @ 6:42AM
The President of the United States: Kim Jong Obama.
Gary B| 2.14.13 @ 7:13AM
Exactly. Perfect description.
Jack in Wi| 2.14.13 @ 7:40AM
Thats a good one Appleby. Obama and his enemies list makes Nixon look like a little piker. Where is the main stream press press standing up for a brother? They are crooked and cowed by a potential dictator.
Aristocat| 2.14.13 @ 7:49AM
It's called shooting the messenger. The US was bankrupt, running $Trillion deficits, so that was a great time to add a multi-$Trillion entitlement program called Obamacare. Brilliant !!
TLP| 2.14.13 @ 8:28AM
As I recall: In olden days, when the King got a Message that he didn't like? He cut off the Messengers Head, and sent it back in a Box.
I think you're mistaking this, with Elton John's: "Don't Shoot Me, I'm Only The Piano Player".
A Great Album, bye the way.
Surely, someone like yourself, owns a Victrola.
Occam's Tool| 2.14.13 @ 12:07PM
I thought there are whistleblower laws.
TLP| 2.14.13 @ 1:29PM
That depends on who's Whistle you're Blowing.
Occam's Tool| 2.14.13 @ 12:11PM
Actually, Tim, there are still good vinyl players. Let me check the name out with my wife.
Kwan| 2.14.13 @ 7:53AM
In these Orwellian Times (January 20, 2009--the present) telling the truth will quickly get you in trouble with the Ministry of Truth also known as the Department of Social Justice. Eric "da Enforcer" Holder's mission is to charge anyone that dares to expose Obama as a worthless bum as an Enemy of the State.
TLP| 2.14.13 @ 8:55AM
And, what will be interesting to watch, is the Look on the Left's Faces when he Comes For Them.
When he inserts himself into the next Labour Dispute at the New York Times, the L.A. Times, the Washington Post, or The Bostson Globe.
When, by Decree, he determines the Size of their Workforces. What their Wages shall be. Their Work Rules, and their Benefits.
When they Print something about him that isn't a piece of Editorial Genuflection. Will they get a Visit to their Office, at 5 O'clock? Or a Subpoena at their Home, in the middle of the night.
All these things are Inevitable, as, with each passing day, President Narcissist's belief that he is Omnipotent grows at an Exponential Rate.
It's why you don't wanna tell your Girlfriend in 9th Grade how Beautiful she is, or how Wonderful she is, and how you'd eat a bucket of her **** to get a look at where it came from.
After about 5 Days of that, she's thinking: "I am Beautiful. I'm all those things he's telling me. Surely, I can do better than him."
She kicks you to the Curb, dumping that bucket of **** on your head, and now you'll never get to see where it came from.
Is anyone following this?
S&P are just the beginning.
The beginning of the End.
Bob Grant| 2.14.13 @ 9:05AM
I think I'm following this.
TLP| 2.14.13 @ 10:55AM
Even the parts about the Bucket of **** and wanting to see where it came from?
Von Mises Jr| 2.14.13 @ 10:27AM
It is already happening, TLP. Rahm "Dead Fish" has now floated that those Cadillac Health Plans promised to the Chicago Public Union employees are going to be offloaded to ObamaCare where they won't get $10 co-pay, $5 prescriptions and the best care possible when needed. Instead they will wait in line and get care "denied" after waiting an eternity to see a PA in the ER or months to see a real Doctor.
In some States, Defined Pension Plans for teachers and cops are going the way of the dodo. They paid off the current established public employees to gain power and now they are not necessary to bribe anymore. In New Jersey, as I believe is common is that the $22-24K Cadillac Health Plans that used to cost the employee 3% now cost them 30%. So what used to be a $60 per month deduction from net pay is now closer to $600 per month.
Public employees apparently were never educated on the lesson that "it is not wise to feed the alligator hoping he will eat you last."
This Martin Niemoller quote about the German Intellectuals collaborating with Hitler tells the story:
First they came for the Socialists, and I did not speak out--
Because I was not a Socialist.
Then they came for the Trade Unionists, and I did not speak out--
Because I was not a Trade Unionist.
Then they came for the Jews, and I did not speak out--
Because I was not a Jew.
Then they came for me--and there was no one left to speak for me.
"All this has happened before, and it will happen again" (Santayana)
TLP| 2.14.13 @ 11:01AM
Absolutely.
They may be eaten, Last?
But, they will be Eaten.
As you so Un-Potty Mouthedly put it: (Santayana).
Sixgun| 2.15.13 @ 10:05PM
TLP.... you always keep me amused and smiling : )
Rhoetus| 2.14.13 @ 10:26PM
von: Stay healthy my friend.
Cobalt| 2.14.13 @ 10:47AM
67 votes in the Senate for conviction on an article of impeachment, and he can be removed from office. 67 votes.
Stephie| 2.14.13 @ 11:48AM
Any idea how many republicans are in the senate today? Perhaps some on the left would jump on board.
Al Adab| 2.14.13 @ 12:53PM
Never Steph and besides even republicans would not vote to martyr Obama and create President Biden.
Robert| 2.16.13 @ 11:51AM
Harry Reid is the gatekeeper. If he doesn't want a piece of legislation to reach the floor, IT DOESN'T!
Thank you, Nevada, for making impeachment impossible!
aquanomics| 2.14.13 @ 10:49AM
There's a poster circulating on facebook that reads:
"Our forefathers would be shooting by now."
Maybe this is the beginning of the beginning.....
Gr0w1er601| 2.14.13 @ 12:11PM
Why do you think DHS has purchased 4,000,000 rounds of ammo so far...?
Sic Semper Tyrannis...
TLP| 2.14.13 @ 1:33PM
Sic Semper Tyrannis, indeed.
Sixgun| 2.15.13 @ 10:08PM
I will answer that call with Semper Fidelis...
Occam's Tool| 2.14.13 @ 12:08PM
Read the Final Chapters of "Come Nineveh, Come Tyre," by Allen Drury.
KennesawJack| 2.14.13 @ 8:05AM
I was thinking that this illustrates the new-found flexibility that Vladimir Obamarx has since his re-election. Putin should be proud. Very proud.
Alan| 2.14.13 @ 8:26AM
Putin is a ruthless, corrupt, strongman, but one thing he doesn't share with the POS in the WH is that Putin does love his country, he is a nationalist if nothing else. The POS in the WH hates this country.
KennesawJack| 2.14.13 @ 9:41AM
Alan, on that point, you are correct. But, you must admit, Putin and Obamarx definetly take the same approach when dealing with those they don't like. I wonder how much gulag time the honchos at S&P are facing.
Alan| 2.14.13 @ 10:10AM
Agree. There was a saying in the cold war, strip away enough communist layers away from a Russian Communist and you'll always find a Nationalist at the core. Strip away the layers off of the POS in the WH, and there aren't but one(aka sheeps clothing) and you'll find a deciever and destroyer.
Doctor Right| 2.14.13 @ 10:20AM
I actually prefer Putin to Obama.
Putin is not a pointy-headed intellectual douche-bag. He's the President of his country and he's doing what he thinks is best to secure his country's future.
He looks at Obama and sees a weak, deluded useful idiot. He looks at Hillary Clinton and sees a complete and utter fool in a pants suit. He looks at the incredible oil and mineral reserves we have in this country and can't believe that we're not drilling 24/7.
He looks at what Obama is doing to the USA and he's probably stunned that the people and the Congress are simply letting him get away with it. He (Putin) sees a serious power vacuum forming on his left flank, and he's not ignoring it - he's exploiting it.
How nice would it be if we had a patriotic President who understood "Realpolitik," and the nature of our enemies.
The shame of it is that Russia and the USA should be natural allies in the global struggle against Islamic Fascism, and against the rising menace of Red China.
KennesawJack| 2.14.13 @ 10:46AM
Doc, agree with pointy-headed and douche-bag. I think you got it wrong with the "intellectual" part. As for the rest of your post, spot on.
Stephie| 2.14.13 @ 11:51AM
Academics ~ not intellectuals.
Occam's Tool| 2.14.13 @ 12:09PM
Dr. R: when it comes down to it, Putin wants his country to grow strong; Obama is a traitor.
Job| 2.14.13 @ 5:05PM
Doc your on the money, add he also understands the Islamic threat to that.
TLP| 2.14.13 @ 8:13AM
And, whatever you do? Don't compare him to Hitler, Mussolini, Castro, or Mugabe.
That's Racist.
He likes Putin, Morsi, and Hugo Chavez. He loved Assad, until the number of Butchered Syrians went over the 50,000 threshold. The UN says that it's up to 70,000 Dead. Yet, Assad is still there, while his Royal Highness: King Barack I - Told us that he sent Warplanes into Libya because Khaddafi had Killed 150 of his own people. (Apparently, they had been watching a You Tube Video)
He loves all of the Trappings of his Status as King, as well as the Pomp and Circumstance of Jetting Off to one Million $ Tropical Vacation after another, with his Queen clutching her $3000 Handbag and Wearing her $600 Sneakers. Her $5,000 Evening Gown, safely tucked away in its Armani Gown Travel Bag, as they head out on their Luxurious Travels, far away from the ungrateful Rabble and their Lists of Grievances that their World, and their Children's Futures are crumbling right before their eyes, under the Crushing Weight of Trillion $ Deficits, $6 Trillion in New Debt (Soon to be Double that) and an Economic Wasteland of No Jobs, More Taxes, More Regulations, No Hope, No Chance, and No Way Out.
More Golf. More Travel. More Lavish Parties at the Castle with his Famous Friends. More Champagne. More Iranian Caviar. More Grilled Sea Bass, for him.
NO SOUP FOR YOU!
And, now he has an ENEMIES LIST, to go along with his KILL LIST.
ARBEIT MACHT FREI.
It's closer than you think.
Doctor Right| 2.14.13 @ 10:14AM
I don't think he'll get away with it in this country.
Oh, for sure...he's a genuine Dictator at heart.
But Americans aren't sheep-like Europeans. We don't have a 1,500 year history of rolling over for each and every despot that considers himself our "King."
I heard an interesting statistic yesterday:
Since Obama became President, Americans have purchased 35 million guns! And they're not being bought by liberal sissies, either.
Tell you what...I'm 46, and I've had a decent life. If and when the time ever comes, I'll be out there. No way in hell would I ever let our beautiful Republic be brought down by a bunch of leftwing scum without a fight.
KennesawJack| 2.14.13 @ 10:48AM
Problem is, Doc. We have guns but Big Sis has all the ammo. I haven't been able to purchase a single box of .38, .45, .30-06, or .308 for at least two months.
Stephie| 2.14.13 @ 11:52AM
Same with us here in VA. No ammo.
Al Adab| 2.14.13 @ 12:55PM
Same all over. No .223, no 9mm. Can't keep it on the shelves.
PJ| 2.14.13 @ 6:20PM
You all need to learn how to reload. Dylan Precision sells great reloading equipment. Having the clothed, pretty female model on their catalog is the only catalog with females models, that hubby is allowed to bring in the house.
KennesawJack| 2.14.13 @ 6:27PM
I reload my own shotgun shells but, you're right. It's time to start reloading my own bullets.
TLP| 2.14.13 @ 11:11AM
Contest, tomorrow.
And, you are Both invited.
You - KJ, and the Kid - Dr. Right.
46?
You could be Anyone of these Old Geezer's Grandkid.
We're gonna have to change the Prize List.
Maybe throw in a Hula Hoop?
Occam's Tool| 2.14.13 @ 12:10PM
I'll load while you shoot.
Sixgun| 2.15.13 @ 10:13PM
I didn't get my bread....
vtwin| 2.14.13 @ 8:16AM
Why not Moody’s? Why not Fitch? Why of the three was Standard & Poor the only one to downgrade the U.S. government from its decades-old AAA credit rating?
TLP| 2.14.13 @ 8:56AM
You think you're immune.
You're not.
SIEG HEIL!
c. j. acworth| 2.14.13 @ 9:16AM
Perhaps Moody's and Fitch didn't downgrade because they looked ahead and asked themselves, "If we do this, what will this lawless SOB in the White House do to us?" The guys at S&P were just lousy chess players.
KennesawJack| 2.14.13 @ 9:43AM
Exactly. BTW, C. J. What was the name of that wing place you told me about? I think it was on Bells Ferry Rd.
TLP| 2.14.13 @ 11:13AM
I think he said it was Big Rod's Gay Bar.
But, I could be wrong.
KennesawJack| 2.14.13 @ 11:38AM
No, that's the one Purp was touting.
Moe Blotz| 2.14.13 @ 12:26PM
Did that bar have a phart phootball tournament recently?
KennesawJack| 2.14.13 @ 12:35PM
I don't know, Moe. Anyone seen Purp? You could ask him.
TLP| 2.14.13 @ 1:36PM
I think he's at Hardcard's House.
That's the rumor, anyway.
Moe Blotz| 2.14.13 @ 2:26PM
Maybe blocking the kick for the extra point.
Doctor Right| 2.14.13 @ 10:09AM
Because they're the only ones with the balls to release an honest report.
And if they're just one of many, WHY does Obama care so much???
S&P is free to render their opinion on the US credit rating. Obviously you Stalinist jack-offs don't like that.
There is a reckoning coming for the Left. They have been provoking real Americans for close to 60 years now, and payback is on it's way.
It may not come today...and it may not come tomorrow. But it's coming.
Bank on it.
SUBVET| 2.14.13 @ 10:50AM
Doc...I fear not in your life time.
Archie| 2.14.13 @ 11:47AM
Perhaps they have different rating methods or algorithms. If they were all identical, why would the market support 3 or more rating agencies?
Al Adab| 2.14.13 @ 8:40AM
Andrew Jackson was the one who said, "reward your friends and punish your enemies." This administration has simply made that political policy into state policy. That friends, is the rule of men and not of law. Ceasar and Bonaparte would be proud.
Albert Constantine Jr.| 2.14.13 @ 9:21AM
Mr. Jackson also famously said of the SCOTUS, "They have made their ruling, now let them enforce it", demonstrating your point about the lack of respect for rule of law (which this administration is working hard to surpass).
Marc Jeric| 2.14.13 @ 9:36AM
Our racist-communist AG Holder is suing S&P for downgrading the US debt. Like a murderer sebtenced to jail by a judge - and then when paroled shoots the judge.
Intelligent Design| 2.14.13 @ 9:59AM
Obama will find that it's impossible to bury the truth, as worldwide holders of U.S. debt demand higher returns, bond prices drop, and the interest carry balloons.
Doctor Right| 2.14.13 @ 10:06AM
And as soon as all of these Wall Street shmucks that backed Obama to-the-hilt start questioning his ever more destructive financial and fiscal polices, Obama will sick his attack dogs on them.
Good.
A-holes.
Datsun 2000 Mark| 2.14.13 @ 10:34AM
Mr. Berlau,
Thank you for pointing out the government is punishing the one rating company (S&P) for revenge. However, all the rating companies should lose their charter for miss rating mortgage securities they were charged with due diligence.
JD| 2.14.13 @ 1:21PM
The government demanded those ratings, got them, and is now blaming their fall guys.
Petronius| 2.14.13 @ 12:26PM
I wouldn't blame the banks, brokerage houses, and lower echelon securities dealers one bit if they decided en mass to cease all trading of government debt instruments at every level. No American in his right mind should have any in his portfolio.
Job| 2.14.13 @ 3:27PM
we gotta stop printing money, STOP, it means STOP. it reminds me of an old joke.
the policeman stops a guy for running a stop sign.
the guy goes hey you should go catch some real criminals i slowed down and looked.
the cop pulls out his billy club and starts beating him in the head with it and goes: "now you want me to stop or slow down...
Rhoetus| 2.14.13 @ 11:02PM
There are too many Democrats with no reasoning ability who accept the Party Line without question, without reflection. One can only hope that the Tea Party supporters can motivate enough voters to defeat them at the poles.
GAmike| 2.14.13 @ 11:12PM
Perhaps S&P should not issue any rating at all on US debt until this gets settled. A simple "...probably better than D" should be an adequate description with the disclaimer that no ratings are actually being done.