DOJ Sues S&P: 3 Red Flags


The Justice Department on Monday filed civil fraud charges against McGraw-Hill Companies (MHP) and its Standard & Poor's unit, accusing the ratings agency of inflating the ratings of various mortgage based products prior to the financial crisis. It's the first major federal action taken against the ratings industry, and its nature and timing are stirring speculation, criticism and a variety of questions.

The suit is expected to be joined by a dozen states, the NY Attorney General and any other body looking to break out the torches and pitchforks and find the monster behind the financial crisis. In the charge, the DOJ says S&P "Knowingly and with the intent to defraud, devised and participated in and executed a scheme to defraud investors."

As word of the suit leaked out in late Monday trading, shares of S&P's parent company McGraw-Hill Companies plunged more than 13%. In a statement released Monday, S&P pointed out that it was not alone in failing to foresee the financial meltdown. The agency also claims that each of the products cited by the government had similar ratings from other agencies.

Taken as a whole, the behavior of the ratings agencies before, during, and after the crisis was reckless at the very least. Two years ago, the agencies as a body were cited in the Financial Crisis Inquiry Report as being "key enablers" in creating the crisis.

The Commission was hardly alone in its criticism. Breakout has been openly critical of the groups for years, as have other media outlets.

(Read more: Wall Street Dragged into Downgrade Witch hunt, Market Stabilization & Rage Against the Ratings Agencies, Ratings Agencies are Ruining the World)

None of the above, however, means the DOJ's civil suit isn't questionable both in timing and merit. Among the questions being asked on Wall Street are these:

Where is Moody's in all of this?

The DOJ says S&P inflated its ratings to gain market share, yet S&P's ratings were in fact in line with the industry. The exclusion of fellow major ratings agencies Moody's Corp. (MCO) and Fitch so far gives the appearance of long-rumored favoritism towards Moody's, in which Warren Buffett of investing and "Buffett Tax" fame is a major shareholder.

Is this retribution for S&P's 2011 downgrade of U.S. credit?

S&P was the only ratings agency to downgrade its rating of the U.S. in August of 2011 during the debt ceiling debate. The move incited rage in DC but may have been the one thing S&P has done right in years as it sent a proper message and didn't damage U.S. credit worthiness in the eyes of the market.

At the time, pols called the downgrade "irresponsible" and then held and investigation into S&P. It challenges credulity to think the DOJ's laser-focus on S&P and the 2011 downgrade are unrelated.

Is this intimidation ahead of the sequestration debate?

The U.S. is heading into another round of brutal budget debate that created a meaningful threat of yet another credit downgrade. In an ideal world of due process, the DOJ suit wouldn't have an impact on the chances of a reduction in the US rating. In the real world, the suit may reduce the likelihood of an agency taking a stance against the U.S.

Laws are enforced to punish wrong-doing, restore confidence in institutions and provide restitution for those harmed. This case does none of those things: S&P is the only body at risk thus far, the case actually reduces the appearance of objectivity in enforcement, and the basis of the case is a 1989 law created to protect financial institutions, not harmed individuals.

The burden of proof is on the government to prove the merit of the case. Unless and until it can do so, this looks like just another case of DC business as usual.


View Comments (119)

Recommended for You

  • Inflation is about to fall-and fall hard: Insana

    I would bet inflationistas a truckload of scarce limes that inflation pressures are temporary and inflation is about to fall, says Ron Insana.

  • Chinese billionaires criticised for giving Harvard $15m

    A Chinese billionaire couple have faced a deluge of criticism for donating $15 million to one of the richest and most prestigious universities in the US, with Internet users saying it would be better spent on students in China. Pan Shiyi and Zhang Xin, the husband-and-wife duo behind real estate…

  • Millions "Rattled" by New Site Releasing Records!

    Your past is now easily searchable online! A new site has made browsing the public records of anyone as easy as entering a name and choosing a state!

    AdChoicesInstant CheckmateSponsored
  • World Bank lauds India PM, offers billions in aid

    The World Bank on Wednesday offered India up to $18 billion in financial support over the next three years while lavishly praising new right-wing Prime Minister Narendra Modi's "ambitious vision" for the country. Modi's Hindu nationalist Bharatiya Janata Party was elected in May with the biggest…

  • Apple Hints New Products Near With Bigger IPhones Looming

    Apple Inc. (AAPL) signaled that the long wait for new products is nearing an end. With bigger-screen handsets in development, Apple said yesterday that shoppers are delaying buying new iPhones, which will weigh on sales in the current quarter ending in September. Yet rather than dissuade buyers…

  • Wealth-Building Secrets of the Millionaire Next Door

    The tenets they follow can also put you on the path to financial prosperity and security. In the words of Knight Kiplinger, editor in chief of Kiplinger's Personal Finance magazine and, "discretionary spending -- the chic apartment, frequent travel and restaurant meals, consumer…

  • Agents get subsidized 'Obamacare' using fake IDs

    WASHINGTON (AP) — Undercover investigators using fake identities were able to secure taxpayer-subsidized health insurance under President Barack Obama's health care law, congressional investigators said Wednesday.

    Associated Press
  • Best marijuana stocks to buy now

    Marijuana is going to be huge growth industry with lots of profits to be made, but that doesn't mean you buy a hyped up weed-related penny stock.

  • Economists worry rising wages may catch the Fed off guard

    By Lucia Mutikani WASHINGTON (Reuters) - Wages may be growing at a faster clip than envisaged by U.S. policymakers, with a recent raft of business surveys showing an increase in the number of companies raising compensation. One closely watched wage growth measure, a gauge produced by the National…

  • Dental Implants: What You Should Know

    Thinking of getting dental implants? There are critical things you should know before going under the knife for the perfect smile.

  • Play

    Chris Davis: The Key to Long-Term Investing

    Davis has beaten the index by looking at cash flow, not daily price changes. Plus: Why more than half of all mutual fund managers don't deserve your money.

    WSJ Live
  • China's rich pimp their planes as jet market takes off

    Shanghai (AFP) - When a Chinese customer asked for the interior of his new Bombardier Challenger 850 jet to be covered with pricey black carbon fibre, the designer was shocked -- but happy to oblige.

  • What a Marijuana ETF Would Look Like

    The changes taking place around marijuana for medical use and for recreational use are the biggest in almost everyone’s lifetime. There are quite literally billions of dollars up for grabs for those who ...

    24/7 Wall St.
  • CEO: Rivers to quit Clippers if Sterling stays

    LOS ANGELES (AP) — The interim CEO of the Los Angeles Clippers testified Tuesday that coach Doc Rivers told him he will quit if Donald Sterling remains the owner of the team.

    Associated Press
  • A Boston Hedge Fund Made $950 Million On One Stock Today

    Shares of Puma Biotechnology (PBYI) were going...

    Business Insider
  • Portfolio Analysis: A Cost-Efficient $353,000 Retirement Plan

    My latest portfolio report card is for Mary in Santee, California. She self-manages a 401(k) retirement plan with $353,000 scattered across seven mutual funds and company stock. Before I assign her investment portfolio a final grade, let's examine Mary's portfolio. Still, her retirement plan misses…

    U.S.News & World Report LP
  • American Express Cards

    Earn Cash Back, Travel, or Points. Find the Card That's Right For You!

    AdChoicesAmerican ExpressSponsored
  • How Good Are Morningstar's Fund Picks?

    Over the long haul, Morningstar's gold-rated funds have topped their indexes. Below are descriptions of three of the firm's less-well-known selections.

  • Play

    Deutsche Bank Under the Federal Reserve Microscope

    A confidential examination by the Federal Reserve Bank of New York found that Deutsche Bank's U.S. operations suffer from a litany of serious problems, including shoddy financial reporting, inadequate auditing and oversight and weak technology systems. David Enrich joins Sara Murray with the…

    WSJ Live
  • Detroit retirees back pension cuts by a landslide

    DETROIT (AP) — A year after filing for bankruptcy, Detroit is building momentum to get out, especially after workers and retirees voted in favor of major pension changes just a few weeks before a judge holds a crucial trial that could end the largest public filing in U.S. history.

    Associated Press
  • U.S. housing turning the corner, inflation creeping up

    By Lucia Mutikani WASHINGTON (Reuters) - U.S. home resales hit an eight month-high in June, suggesting the housing market was gradually regaining momentum and would help the economy to stay on a higher growth path this year. The third straight month of home sales gains, reported by the National…

  • JetBlue pilot among 6 arrested in Boston drug bust

    BOSTON (AP) — A JetBlue pilot from Florida is among six people arrested by Boston police over the weekend in an investigation of drug dealing incidents near the Boston Common.

    Associated Press
  • Play

    This Wide-Moat Stock Pumps Up the Volume on Dividends

    This company regularly considers an additional fifth special dividend per year, which can turn into a nice payout for shareholders.

  • Often Overlooked Method to Pay Off Mortgage

    If you own a home and pay for a mortgage, you could reduce your payments by as much as $3,000 a year. Here is how it works.