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.
Eric Holder (Bloomberg photo at WSJ)
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.
4TH ST8 
[…] Obama’s thugocracy sues rating agency that downgraded the U.S. government’s credit ratin…. […]
Jack Lew was not “the head of Citigroup’s subprime mortgage investment division.”
You simply made that up.
WSJ: “During the darkest days of the financial crisis Mr. Lew served as the chief operating officer of Citigroup’s Alternative Investments unit (CAI). When Mr. Lew took this job in January 2008, the unit was already infamous for overseeing ‘structured investment vehicles’ that hid mortgage risks outside Citi’s balance sheet. It also housed internal hedge funds that were in the process of imploding.
“CAI no longer exists. At the end of Mr. Lew’s first quarter on the job, the unit reported a $358 million loss. Things got much worse after that but Citi stopped breaking out CAI results in its earnings releases. The unit was eventually shuttered and many of its assets were sold.”
That has nothing whatsoever to do with “being the head of Citigroup’s subprime mortgage investment division.” You don’t understand banking.
WSJ
“Speaking of the debt-limit fight, that’s also coincidentally when White House Chief of Staff Jack Lew was aggressively promoting the President’s campaign to prevent entitlement reform. Mr. Lew had worked in the heart of Citigroup’s C -0.15% subprime investment factory, and the President has not only been willing to forgive and forget. He’s even nominated Mr. Lew to become Secretary of the Treasury. But the company that put a shot across the Beltway bow over deficit spending is now the only target of a credit-ratings prosecution.”
Any way its sliced, it stinks and the fish is rotten from the head down.
yeah — Subprime securitization, special investment vehicles, what’s the diff?
Stinks, thats the diff.
A suit against a credit rating corporation by an entity many trillions in debt with only promissory notes from taxpayers as assets seems a bit frivoulous. How is the suit entitled, The United States of America, a loosely licensed corporation, AKA Obama kingdom vs. nervy S & P, AKA nervy upstart SOBs.
Amusing styling, Vernon.
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If you guys want a description of what the lawsuit is actually about, try this:
http://dealbook.nytimes.com/2013/02/05/case-details-internal-tension-at-s-p-amid-subprime-problems/?ref=todayspaper
Predictably whitewashes the administration. But it is good to look at things from the point of view the other side claims it has. Kinda looking down their noses at everyone else.
I think the burden of proof in this case is pretty high. Am I correct that gross negligence must be proved in order for the plaintiff to win?