Jump to navigation

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
Follow Futures          
       
more >>

We Asked Traders

We asked traders for their opinion on the launch of bitcoin futures

Sponsored Content

Trading

Equities.com launches unlimited trading via Tradier Brokerage, Transforming into a news & fintech portal

Featured Topics

more Commodities>>

Commodities

Energy demand steps back in play
Advertisement
more Volatility>>

Volatility

Volatility & opportunity in the energy sector
more Financials>>

Financials

Daily Price Action: E-mini S&P 500
more Options>>

Options

Trading Vertical Option Spreads

Advertisement

Pursuit of S&P started when toxic debt masqueraded as AAA

Case was known internally as 'Alchemy'

By Phil Mattingly

February 11, 2013 • Reprints

Math Disputed

The administration disputed S&P’s rationale -- and its math -- when it downgraded the U.S. Treasury credit rating. The administration showed S&P that its 10-year estimate of the U.S. deficit was $2 trillion higher than the nonpartisan Congressional Budget Office. The company revised its figures and still stuck with the reduction from AAA to AA+.

The downgrade proved meaningless in the markets, which still consider the U.S. the safest of bets even as the political gridlock in Washington persists. Yields on 10-year Treasury notes fell to 1.72 percent on Sept. 22, 2011, from 2.56 percent the day of the downgrade. Borrowing costs remain below pre- downgrade levels, at 1.97 percent yesterday.

S&P gave the Treasury a credit rating lower than it had given some of the mortgage-backed securities and collateralized debt obligations that collapsed in 2007 and 2008. The language the administration used to describe S&P’s performance then isn’t much different from how officials now describe the lawsuit.

‘Fundamental Questions’

John Bellows, an acting assistant Treasury secretary for economic policy, said in a blog post the decision to downgrade the U.S. even after being shown errors in its analysis raised “fundamental questions about the credibility and integrity of S&P’s ratings actions.”

The company, as it stood by its decision, said the reaction from Treasury and the White House was typical of a country that had just seen their sovereign credit cut.

The Justice Department says the suit isn’t related to the downgrade or any political decision. It says it took time to build its case that the S&P made false representations, concealed facts and manipulated ratings criteria linked to the financial instruments that helped trigger the financial crisis.

Still, the announcement of the suit puts a level of pressure on S&P that isn’t on other raters -- at least not yet. The $5 billion potential penalty would equal more than five years profit for McGraw-Hill. The company’s shares were battered last week, dropping more than 25 percent, and Fitch put its ratings on watch for possible downgrades.

The White House has declined to answer questions on the lawsuit, directing reporters to the Justice Department.

30 Million

To prepare its suit, lawyers from the Justice Department’s civil division and the U.S. attorney’s office in Los Angeles sifted through more than 30 million pages of documents, including e-mails, according to a department official briefed on the case. Interviews were conducted with more than 100 individuals, including meetings with cooperating witnesses, said the official who requested anonymity to discuss the case.

“Our lawyers and staff served hundreds of civil subpoenas, spent thousands of hours reviewing and analyzing millions of pages of documents, and contacted and interviewed over 150 witnesses, including dozens of former S&P analysts and executives,” Stuart Delery, head of the Justice Department’s civil division, said last week flanked by 7 of the 17 state and District of Columbia attorneys general who have also brought suits against the company.

Settlement Discussions

Government and S&P lawyers had multiple, extensive exchanges in the months before the filing of the lawsuit, the official said. They were unable to come to an agreement.

Two other people briefed on the case described settlement discussions, which started late last year, as unproductive in the weeks leading up to the lawsuit. By the time the case was filed, the two sides remained far apart on any agreement, said the people, who requested anonymity to discuss private talks.

Both sides say they are ready to take the case, filed in California, to court. S&P hired John Keker, the San Francisco trial attorney, who has represented investment banker Frank Quattrone and Enron Corp. executive Andrew Fastow, to join its team defending the company. Quattrone, founder of Qatalyst Partners, won dismissal of all criminal charges that he obstructed a federal investigation into Credit Suisse AG. Fastow pleaded guilty in 2004 to two counts of wire and securities fraud.

‘Meritless’ Lawsuits

Spokeswoman Catherine Mathis said the firm would “vigorously defend S&P against these unwarranted claims” which she said were part of “meritless civil lawsuits.”

“Claims that we deliberately kept ratings high when we knew they should be lower are simply not true,” Mathis said in a Feb. 5 statement.

Holder said the Justice Department “would not have brought this case unless we felt we had a case that we could bring and that we would win.”

“And that’s what I expect to have happen,” he said.

Holder and West declined to comment on whether Moody’s or Fitch might face similar charges.

Penalties for false representations, concealed facts and manipulated criteria linked to ratings on portions of more than $4 trillion of debt securities could reach $5 billion, the Justice Department said. That is more than enough to exhaust New York-based McGraw-Hill’s $1.2 billion of cash on hand and the $1.86 billion of excess funds that analysts project the company will generate this year.

Free Speech

Floyd Abrams has defended S&P’s ratings on free speech grounds. Abrams is the Cahill Gordon & Reindel LLP attorney who defended the New York Times and won a Supreme Court decision upholding the publication’s First Amendment rights in the Pentagon Papers case, and then faced criticism for his work defending reporters in the investigation over the leak of a Central Intelligence Agency operative’s name during President George W. Bush’s administration.

The lawsuit’s approach, alleging that S&P knew its ratings were faulty, will require a different defense, Abrams said in a Feb. 5 Bloomberg Television interview.

“It’s not a First Amendment case,” Abrams said in the interview with Sara Eisen. “The government is alleging that S&P didn’t believe what it said; the First Amendment doesn’t protect against that.”

Abrams, who will be joined by Keker in defending the company as the case moves forward, said the company’s lawyers held settlement discussions with the Justice Department for at least four months.

Former SEC Chairman Arthur Levitt predicted in a Feb. 6 interview on Bloomberg Television there would be “a substantial settlement” between the company and the government.

“The government is trying to win, and McGraw-Hill is foolish not to have made a settlement with them,” said Levitt, who is on the board of Bloomberg LP, the parent company of Bloomberg News.

www.bloomberg.com

<<< previous
Page 2 of 2

About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Related Articles
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
GBP/USD drops as weak CPI reduces BoE May rate rise odds
Previous
CFTC approves amendment to Cantor Clearinghouse registration order
Next
Stock market challenged by resistance on low volume
Related Terms
Standard & Poor 2008Congress 1894California 1387Barack Obama 909Securities and Exchange Commission 905U.S. Treasury 854Michigan 789Senate 610Connecticut 587White House 506Bloomberg Television 360Obama administration 333Department of the Treasury 274Obama 166Congressional Budget Office 149the New York Times 139Bloomberg LP 118Fitch Ratings 114the University of Michigan 110George W. Bush 109Supreme Court 98U.S. Justice Department 78Pentagon 67Timothy F. Geithner 66Central Intelligence Agency 64Moody 62Peter Schiff 57Barney Frank 47District of Columbia 47Sara Eisen 33Eric Holder 30Credit Suisse AG 23McGraw-Hill Cos. 22Westport 21DoJ 20Mortgage 16Enron Corp. 14Standard & Poor's 11Arthur Levitt 10Treasury Department 7Fimalac SA 5Michael Barr 4Bipartisan Policy Center 3John Keker 3Tony West 3Catherine Mathis 3Hearst Corp. 2Protection Bureau 2Crisis Inquiry Commission 2Stuart Delery 2Frank Quattrone 2alchemy 1justice department 1Euro Pacific Capital Inc 1Qatalyst Partners 1Cahill Gordon & Reindel LLP 1John Bellows 1Andrew Fastow 1Floyd Abrams 1Aaron Klein 1

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
images