“The case always looked fishy. Justice sued in 2013, though the facts about S&P ratings on mortgage-backed securities issued from 2004 and 2007 were known for years. And Justice chose not to charge S&P’s main rival Moody’s, though Moody’s had put an identical rating on most of the securities mentioned. (But unlike S&P) Moody’s never downgraded U.S. debt. A key piece of evidence was an affidavit (under oath) from Harold McGraw III, the chairman of S&P’s parent, reporting that three days after the downgrade an angry Treasury Secretary Timothy Geithner told him on the phone that the firm’s conduct would be “looked at very carefully.” Mr. Geithner denies (not under oath) making a threatening call, but Treasury records show the call occurred within minutes after Mr. Geithner left a meeting with President Obama…

…What did Messrs. Obama and Geithner discuss? We may never know after this settlement. But after insisting for years that S&P admit wrongdoing, Justice recently dropped that demand when S&P agreed to drop its claim of retaliation based on what S&P had learned “to date.” The settlement means S&P can’t continue discovery in the case, which was going well. Court rulings had required Justice to turn over numerous internal documents, and S&P’s lawyers told the government they would next seek documents related to why Moody’s wasn’t charged. Down the road were requests for sworn testimony from Mr. Geithner and for documents reaching into the Executive Office of the President.

Justice may have decided it was better to settle at a political discount and claim victory. The New York Times reports that Justice official Stuart Delery told those involved in the settlement talks that there is “a great deal of cynicism about the functioning of government, and it’s very important that this case not add to that cynicism.”

Sorry, but a settlement that shuts everybody up won’t end cynicism.

Mr. Delery insists that Justice “brought this case because S&P committed fraud.” So why isn’t he going to court to prove it? If Justice is offended by S&P’s payback defense, remains convinced that fraud occurred, and wants to demonstrate how well government functions, the logical step is to go to trial.”, Wall Street Journal Editorial Board

Review & Outlook

A Poor Standard of Justice

The S&P settlement shuts down discovery into political payback.

The Justice Department’s $1.375 billion settlement with Standard & Poor’s is being hailed as a victory by both sides. The feds claim another corporate pelt related to the financial crisis, while S&P talked the fine down from $5 billion and didn’t admit guilt. This means the only losers are Americans who may never learn if the suit was a case of political retribution.

The case always looked fishy. Justice sued in 2013, though the facts about S&P ratings on mortgage-backed securities issued from 2004 and 2007 were known for years. The case launched 18 months after S&P had issued a historic downgrade of U.S. Treasury debt from triple-A. And Justice chose not to charge S&P’s main rival Moody’s , though Moody’s had put an identical rating on most of the securities mentioned in the lawsuit. Moody’s never downgraded U.S. debt.

S&P is right that the settlement is a government retreat—with Justice settling for $687.5 million, plus an equal amount to settle claims by 19 states and the District of Columbia. S&P also settled another case with a $125 million gratuity for the California Public Employees’ Retirement System.

This is real money, but by not admitting guilt the ratings agency avoids handing ammunition to the plaintiffs bar. Last year Justice was demanding that S&P admit fault and pay more than $3 billion to settle. But Justice lowered its asking price as S&P mounted a credible argument that the suit was payback for S&P’s Treasury downgrade.

A key piece of evidence was an affidavit from Harold McGraw III, the chairman of S&P’s parent company McGraw Hill Financial , reporting that three days after the downgrade an angry Treasury Secretary Timothy Geithner told him on the phone that the firm’s conduct would be “looked at very carefully.” Mr. Geithner denies making a threatening call, but Treasury records show the call occurred within minutes after Mr. Geithner left a meeting with President Obama.

What did Messrs. Obama and Geithner discuss? We may never know after this settlement. But after insisting for years that S&P admit wrongdoing, Justice recently dropped that demand when S&P agreed to drop its claim of retaliation based on what S&P had learned “to date.”

The settlement means S&P can’t continue discovery in the case, which was going well. Court rulings had required Justice to turn over numerous internal documents, and S&P’s lawyers told the government they would next seek documents related to why Moody’s wasn’t charged.

Down the road were requests for sworn testimony from Mr. Geithner and for documents reaching into the Executive Office of the President. The judge made clear that such disclosures would be compelled only if S&P had exhausted all other avenues to obtain information and could overcome executive privilege.

But given S&P’s success in forcing Justice to cooperate, Justice may have decided it was better to settle at a political discount and claim victory. The New York Times reports that Justice official Stuart Delery told those involved in the settlement talks that there is “a great deal of cynicism about the functioning of government, and it’s very important that this case not add to that cynicism.”

Sorry, but a settlement that shuts everybody up won’t end cynicism. Mr. Delery insists that Justice “brought this case because S&P committed fraud.” So why isn’t he going to court to prove it? If Justice is offended by S&P’s payback defense, remains convinced that fraud occurred, and wants to demonstrate how well government functions, the logical step is to go to trial.

In another remarkable coincidence, on the brink of the settlement this week the Journal reported that Justice is finally investigating Moody’s. Our guess is the timing was intended to blunt claims that Justice was only out to punish S&P. If Congress can spare the time, maybe it can pick up the trail into what still looks like a case of political payback.

Posted on February 9, 2015, in Postings. Bookmark the permalink. Leave a comment.

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