Wall Street Dragged into S&P Downgrade Witch Hunt

Jeff Macke

The issue may have been moved off the front page of the newspapers, but the government's reprisals against those even tangentially connected to Standard & Poor's downgrade of US debt continues. The latest development reported yesterday, is the SEC allegedly issuing subpoenas to hedge funds and other firm that placed "unusually large bets that markets would decline" ahead of the ratings agency's August 5th downgrade.

S&P itself is already under assault from local governments, the US Senate, the Treasury Department, and perhaps most daunting, the new Czar of Financial Morality, Warren Buffett. Curiously none of this official outrage is being directed at the entire ratings industry for its nakedly conflicted business model or its role in the housing crisis. The government (and Mr. Buffett) are targeting Standard & Poor's exclusively because the agency had the audacity to point out the obvious fact that betting on America is no longer the "sure thing" it once was.

It's worth noting that the ratings industry got a pass on the 2008 financial crisis because the government upheld their First Amendment rights to an opinion. Now S&P exercising that same right in regards to American debt is unleashing hell upon the agency and market bears in general. It would seem the First Amendment applies optimistic self-serving idiocy, not negative views, flawed though they may be.

Did hedge funds hear rumors of a downgrade? Almost certainly. So did I (and I said so on Eric Bolling's "Follow the Money" program that day). Stifel Nicolaus wrote of "chatter" regarding the downgrade the morning of August 5th. Pretty much everyone knew, even if no one could confirm it. A downgrade of the US was in the air and had been since the move was threatened three-weeks prior to August 5th. Traders didn't need Standard & Poor's to tell them that stocks were in trouble, it was quite obvious to anyone with a brokerage account or access to a newspaper.

The SEC investigation is intimidation of the lowest form. It says the market isn't free to those who are bearish. The investigation says negative trades will be punished, should they prove prescient. But only selectively. The SEC has never provided a satisfactory answer regarding the heavy put activity in airline stocks prior to September 11th, 2001.  No one of import has gone to prison over the financial fraud leading to the meltdown.  S&P and the ratings agencies skated on the housing crisis.  All these issues are still "out there" yet the government immediately cracks on a couple funds who correctly bet that stocks were headed lower. It's embarrassing.

If you're of the belief that SEC subpoenas are unrelated to the abuse being heaped upon Standard & Poor's for the downgrade, then you live in a mental Toon Town or I'm way too cynical. The SEC is a different, obstensibly independent group. It also seems politically expedient for any and all public officials to go after both Standard & Poor's and "the rich." There are no coincidences in Washington, D.C. particularly with this kind of coordinated attack.

The way our public officials are squashing S&P's right to do their job and market participants' right to both buy and sell stocks is troubling. This isn't an issue of whether or not you like or approve of rating agencies or hedge funds. This is an issue of the government selectively harassing and prosecuting that which they find too negative. It's present day America's version of sending dissidents to Siberia and it's disgusting.

View Comments (157)