Did the Department of Justice file a lawsuit against Standard & Poor to get revenge?
Then secretary of the treasury Timothy Geither told McGraw Hill Financial Inc. Chairman Harold W. McGraw III in 2011 that S&P’s downgrade of the U.S. debt would be met with a consequence, reports Bloomberg.
In a federal court in Santa Ana, California on Tuesday, McGraw filed a declaration on the behalf of S&P requesting the U.S. to release evidence that the firm believes will supports its claim that the government filed a fraudulent lawsuit against the company last year in retaliation to its downgrade of U.S. debt in 2011.
According to his court statement, McGraw said Geithner phoned him on Aug. 8, 2011, after S&P acted alone in downgrading the government’s debt rating. McGraw says that the former Treasury Secretary promised him that S&P would be held accountable for the downgrade.
Geithner allegedly warned McGraw,“S&P’s conduct would be looked at very carefully” and that “such behavior would not occur without a response from the government.”
A response did indeed come. Last year, the Justice Department accused the credit rating firm of lying about its ratings and argued that S&P owed as mush as $5 billion in civil penalties for losses suffered by federally insured financial institutions that relied on sound credit ratings for mortgage-backed securities and collateralized-debt obligations.
The government accused S&P of lowering the government’s ratings out of its own self-interest, arguing in 2013 that the firm knowingly downplayed the risk on securities before the credit crisis in effort to win business from investment banks seeking the highest possible ratings to help them sell the instruments.
Government officials have denied McGraw’s allegation and claim that the lawsuit was not a consequence of the 2011 downgrade.
“The allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S&P is false,” Jenni LeCompte, a spokeswoman for Geithner, also told Bloomberg.
In the discovery request sent to U.S. District Judge David Carter, S&P said the government was initially investigating all three major credit rating companies and focused on S&P exclusively after the McGraw Hill office downgraded U.S. debt.
Federal lawyers have denied this claim.
“We are simply asking the court to order the government to provide the discovery S&P is entitled to so it can properly defend itself against these meritless claims,” Ed Sweeney, a spokesman for New York-based S&P, told Bloomberg. “S&P reviewed the same subprime mortgage data as the rest of the market, including U.S. government officials, who publicly stated that problems in the subprime market appeared to be contained.”
Sweeney explained that S&P was being unfairly targeted.
“Additionally, S&P’s ratings on the CDOs in question were substantially the same as those provided by the other rating agencies, yet the government has chosen to charge just S&P,” he said.
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