Insider's Game

Selected writings by David Fiderer

Rating Agency Lawsuit: How S&P Fabricates Evidence Out of Thin Air

First published in OpEdNews on February 28, 2014

“Last month we wrote about the threatening phone call from then-Secretary of the Treasury Timothy Geithner to the head of the parent company of Standard & Poor’s after S&P downgraded the U.S. credit rating in 2011,” says opinion piece at The Wall Street Journal.



Now we learn that Mr. Geithner placed the call to McGraw Hill Chairman and CEO Harold McGraw III just five minutes after leaving an Oval Office meeting with President Barack Obama.”Except there is no evidence of any threat, just some verbal sleights of hand contrived by McGraw’s lawyer. And McGraw was first contacted the day before Geithner’s meeting with the President.  Smoke and mirrors is not evidence. Which is why Standard & Poor’s allegation, that the Justice Department sued the rating agency as retaliation for its downgrade of U.S. government bonds, is complete bulls***.


S&P’s lawyer, Floyd Abrams of Cahill Gordon, is a master of doublespeak. He concocted a story of a government payback in the same manner that swindlers and crackpots concoct their conspiracy theories.  He cherry picked words and facts, which he then sliced, diced and separated from any formal nouns. By removing key identifiers–pertaining to who, what, when, where or why–he was able to insinuate that Geithner’s straightforward and banal remarks constituted some kind of veiled threat. And then he plucked out a new factoid to implicate Barack Obama.


If you go back to the beginning of Abrams’ disinformation campaign, on February 5, 2013, you can see how easy it is to fabricate something out of nothing. On the same day that the government filed its suit, claiming that S&P assigned fraudulent ratings to a litany of residential mortgage bonds and CDOs, Abrams appeared on CNBC.  He insinuated that the government’s litigation strategy changed after August 5, 2011, when S&P announced its downgrade of Treasuries from triple-A to double-A-plus.


“Is it true that after the downgrade the intensity of this investigation [S&P] significantly increased? Yea,” he told CNBC’s David Faber. “We don’t know why.”


His insinuation fails the laugh test.  Abrams would have no idea how or when the government inquiry gained steam. The Justice Department is not in the practice of informing outsiders about the ebb and flow of its investigations. Abrams had access to some information, a small tip of a large iceberg. And what, exactly, did he mean by an “increase in the intensity of the investigation”?


Bloomberg’s reporting suggests the investigation accelerated in July 2011, when the Justice Department interviewed three former S&P executives. Or perhaps things really got going once the agency had sifted through evidence forwarded by Sen. Carl Levin’s  Permanent  Subcommittee on Investigations in May 2011 , and by State attorneys general in Connecticut, Illinois and California. In addition to the U.S. government, at least 17 State attorneys general all brought lawsuits against S&P based on substantially identical fact situations set forth in their complaints. Are we to believe that all these plaintiffs were driven by grudges against the downgrade of U.S. government debt?  The evidence, that the processes for rating CDOs had devolved into a sham, is pretty overwhelming.


If the government investigation had some identifiable inflection point after August 5, 2011, that date could have occurred on any business day over the span of one year. The sheer vagueness of Abrams’ timing, combined with his fuzzy concept of “increased intensity,” add up to nothing.


But his comments did lay out the pretext for his baseless assertion that the government  retaliated against S&P because it exercised its First Amendment rights. Abrams’ devices are amplified in Harold McGraw’s three-page affidavit, a masterwork of factual slicing and dicing.


Here’s the context: On late Friday, August 5, 2011, the rating agency downgraded U.S. government bonds, from triple-A to double-A-plus, primarily because of the Congressional brinksmanship over raising the debt ceiling, which raised the specter of a US default.


Whether or not the downgrade was justifiable, it posed a threat to the dollar’s status as the world’s reserve currency, and it added a measure of instability to the markets, since some funds that only invest in triple-A bonds.


S&P notified Treasury of the downgrade at 1:30 pm that day, before the announcement was made public. Right away, Treasury officials identified a big error in S&P’s math, which increased discretionary spending levels by $2 trillion above what was estimated by the CBO. So S&P hastily revised its numbers, and there was some internal wrangling, which is why the downgrade was not publicly announced until 8:00 p.m. S&P said it did not think that $2 trillion swing was so significant that it should reconsider its rating opinion, which was driven primarily by political analysis.


Treasury offered a stinging and detailed rebuke to S&P’s analysis the very next day, after the rating agency publicly admitted to the initial $2 trillion error.


Geithner was pissed and he wanted to let Harold McGraw know why.  So on Sunday August 7, an Executive Vice President at the New York Fed left a message at McGraw-Hill headquarters, along with his office and cell phone numbers. He asked Harold McGraw to call back on Monday morning.


On Monday morning, McGraw returned the call and got an earful. The New York Fed official was passing along a message from his former boss, Timothy Geithner. Here’s the key part of his artfully drafted affidavit:


[The NY Fed official] said that Secretary Geithner was very angry at S&P. He said that Mr. Geithner viewed S&P’s processes as flawed. He said that it would have been better if I [McGraw] had called Mr. Geithner on Friday to let him know what was happening.

Later that morning, I received a call from Mr. Geithner himself. I was not available when the call came in, and I returned it. Mr. Geithner expressed anger at the downgrade. In the course of our discussion, he referred to an asserted two trillion dollar error in S&P’s work, an error that he had described in various discussions with the media following the announcement of the downgrade.


Having been briefed on the issue by S&P personnel in the wake of those statements by Mr. Geithner, I explained to him that in relying on Congressional Budget Office figures, as it had, S&P had not made an error. Mr. Geithner said that S&P had made a huge error and that “you are accountable for that.” He added that S&P had a previous history of errors and that this was not the first mistake it had made.

As I reported contemporaneously to my colleagues, he said that, “you have done an enormous disservice to yourselves and to your country”, that the U.S. economy was bad and that the downgrade had done real damage. S&P’s conduct would be “looked at very carefully” he said. Such behavior could not occur, he said, without a response from the government.


Notice how Geithner gets smeared by a phony story, wherein his accusation of a $2 trillion error is characterized as false. By, “relying on Congressional Budget Office figures, as it had, S&P had not made an error,” says McGraw. The truth was that S&P misread CBO figures, which is why it made a $2 trillion error, which was identified by Treasury, and subsequently corrected by S&P.  The rating agency publicly admitted as much two days prior to Geithner’s phone call.


Abrams is a master of the vaguely referenced pronoun, as exemplified by, “Mr. Geithner said that S&P had made a huge error and that “you are accountable for that.”  Was Geithner referring to the $2 trillion miscalculation or the overall downgrade or something else? We don’t know. But since McGraw said he had nothing to do with the credit ratings, Geithner laid out a few points that, to anyone in the financial world, would seem perfectly obvious.


Of course, “you [S&P] are accountable,” in terms of your business reputation, for any rating decisions and mistakes. And S&P’s mistakes, in rating monoline insurance companies if nothing else, are legendary.


The coup de grace, in terms of shifting chronology and vaguely referenced pronouns, was the following excerpt:


S&P’s conduct would be “looked at very carefully” he said. Such behavior could not occur, he said, without a response from the government.”


Notice we have no idea who looked carefully at the analysis supporting S&P’s work product, which morphs into “conduct” and then “behavior.” And, by way of the subjunctive, we have no idea when a government response would be forthcoming.


But let’s consider what would be perfectly obvious to anyone in the financial world. Of course, S&P’s analysis “would be looked at very carefully” by central bankers and anyone else holding large amounts of government bonds. And of course the downgrade “could not occur without a response from the government,” which was widely disseminated before McGraw picked up the phone.


So at the end of the day, what does S&P have to show that the  current lawsuit, pertaining to toxic mortgage bonds and CDOs, in any way represents a “response”  by U.S. government to the S&P downgrade? Absolutely nothing.