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Yet it is precisely that mispricing of risk, and a concerted effort to rehabilitate its reputation, that likely compelled S&P to downgrade America’s debt. Whether that effort caused them to overreact in the other direction becomes the ultimate — and ultimately political — question.
Bob Litan, deputy assistant attorney general at the Department of Justice from 1993 to 1995, waded into the political morass, addressing the suspicion by more than a few Americans that the investigation was payback for the downgrade. ”Having been at the Justice Department, I don’t think the department behaves that way. I think this is almost certainly a coincidence. It’s just the way these things happen,” Litan told ABC News. He also believes the investigation isn’t limited to S&P. ”My guess is that if the Justice Department is investigating one agency, it’s investigating them all,” he said. “Given what we all know now in the run-up to the financial crisis, all the ratings agencies were doing similar things in rating these securities. If S&P is guilty of something I find it hard to believe the others wouldn’t be too.”
This has been the most compelling aspect of the story. If S&P is being singled out, it would be an obscene breach of ethics on the part of the administration. One would think the DOJ would make it clear one way or the other as soon as possible. But an overlooked aspect of the story is the possible conflict of interest regarding any ratings agency investigation. In the years leading up to the housing crisis, and continuing through to the present, it was the DOJ which forced banks to make questionable mortgages available to less-than-qualified applicants. As of May, more than 60 banks were under investigation by the DOJ for “lending discrimination,” and a Fair Lending Unit staffed with more than 20 lawyers, economists and statisticians, was created for the very first time, to facilitate investigations.
Thus, a logical question arises: if banks have been pressured to make questionable loans, is it possible that the Justice Department, if not pressuring the ratings agencies, was at the very least inclined to look the other way when those bundled mortgages were highly rated?
We may never know, as least as far as the SEC is concerned. On Wednesday, Rolling Stone Magazine reported that the SEC ”devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation.” The destroyed files included a “2002 inquiry into financial fraud at Lehman Brothers,” a “2009 preliminary investigation of insider trading by Goldman Sachs” and “records for at least three cases involving the infamous hedge fund SAC Capital,” according to “a whistle-blower at the SEC who recently came forward to Congress.”
As for the Justice Department, it, too, is embroiled in a high degree of questionable behavior, from its dropping of the voter intimidation case against members of the New Black Panthers in Philadelphia during the 2008 election, to the current stonewalling of the investigation into the Mexican gunwalking scandal known as “Fast and Furious.”
None of this excuses any impropriety in which S&P or the other ratings agencies may have been engaged. As the Times points out, these agencies were paid $100,000 to rate mortgage bond deals, and “several hundreds of thousands of dollars more for rating the far more complex collateralized debt obligations“ (CDOs) which contributed mightily to the financial crisis of 2008. Yet it was the banks themselves who shopped around for agencies willing to give them good credit ratings in exchange for the banks’ business. And it was the DOJ who pressured the banks to make questionable loans.
Thus, the ultimate question arises: where’s an independent special prosecutor when America desperately needs one?
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