Attorney General Eric Holder is suing the Standard & Poor’s credit rating service for $5 billion for fraudulently giving overly optimistic ratings to residential mortgage-backed securities that subsequently crashed in value and cost investors untold amounts of money, according to Bloomberg News.
The Justice Department investigation, code-named “Alchemy,” began in November 2009, and reportedly looked into a number of ratings agencies but litigation against only S&P was announced Tuesday.
A funny thing happened along the way, according to a Wall Street Journal editorial today.
The newspaper quotes an S&P attorney as saying “things seemed to rev up in terms of the intensity” of the federal probe in 2011, about the time the agency downgraded Washington’s credit worthiness during the debt-limit fight. That was about the same time the credit rating agency Moody’s, which did not downgrade the government, was dropped from the investigation.
WSJ could not resist pointing out the rich irony of the fact that Jack Lew, nominated to be secretary of the Treasury, was the head of Citigroup’s subprime mortgage investment division. Lew was paid nearly $1 million at a time the company’s stock value was crashing as a result of bad investments.
Bloomberg also points out that Obama’s new director of the Consumer Financial Protection Bureau, Richard Cordray, when he was the attorney general in Ohio, sued all of the big three ratings agencies — S&P, Moody’s and Fitch — accusing them of giving fraudulent credit ratings that cost public employee pension funds to lose money.
A judge dismissed the case, saying such opinions are essentially protected free speech and “predictive opinions.” A federal appeals court upheld the ruling in December.
In a right-hand-doesn’t-know-what-the-left-hand-is-doing mode, the WSJ points out that SEC rules require financial institutions to hold assets that are highly graded by the Big Three. But Justice is suing S&P, not the SEC.
Don’t think it is a co-incidence that only S&P is being sued and the government is using an argument that has already failed in court, while the president appoints people involved in abject failures to lucrative government jobs.