In Defense Against MBS Fraud Case, S&P Cites Obama Meeting
Standard & Poor’s said President Obama met with Treasury Secretary Timothy Geithner just before Geithner warned the company to expect a response to its downgrade of U.S. debt, an event that justifies its request to see White House communications to help defend fraud claims.
The timing of Obama’s 2011 conference with Geithner may support S&P’s claim that the Justice Department’s fraud lawsuit against it last year was retaliation, the company said yesterday in a filing in federal court in Santa Ana, Calif.
The meeting, listed in Geithner’s calendar records, came immediately before Geithner voiced his “anger” about the downgrade in a phone conversation with McGraw Hill Financial Inc. Chairman Harold W. McGraw III, according to S&P.
The government seeks as much as $5 billion in civil penalties for losses to federally insured banks and credit unions who relied on S&P’s claims that its ratings of residential mortgage-backed securities and collateralized-debt obligation before the collapse of the housing market were free of conflicts of interest.
S&P has said it gave the same ratings as Moody’s Corp. to those securities and was singled out because it was the only credit rating company to downgrade the U.S. in August 2011. Geithner met with Obama the morning of Aug. 8, three days after the downgrade, S&P said in its filing.
“Immediately after his meeting with the president, Secretary Geithner returned to his office and, at 10:15 a.m., he called Mr. McGraw personally,” S&P said, citing Geithner’s calendars, available on the Treasury Department’s website. The entries don’t reflect what Obama and Geithner discussed.
“On that call, Secretary Geithner stated to Mr. McGraw that S&P had done an ‘enormous disservice to yourselves and to your country,’” according to the filing.
The Justice Department said last month that S&P’s quest for White House records was a “fishing expedition” and urged U.S. District Judge David Carter to deny the New York-based rating company’s request to force the government to hand over the information.
The government alleged in its Feb. 4, 2013, complaint that S&P knowingly downplayed the risk on securities before the credit crisis to win business from investment banks seeking the highest possible ratings to help them sell the instruments. The Justice Department has denied any connection between the downgrade and the lawsuit.
Ellen Canale, a spokeswoman for the Justice Department, declined to immediately comment on yesterday’s filing. Jay Carney, White House press secretary, didn’t immediately respond to an email seeking comment.
“The allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S&P is false,” Jenni LeCompte, a spokeswoman for Geithner, said in an emailed statement last month.
S&P said in a January filing that it seeks information about any government analyses or studies of the independence and objectivity of all rating services, about fraud investigations of issuers of mortgage-backed securities it rated, and about the Justice Department’s decision to sue Standard & Poor’s.
The government said in a Feb. 17 filing that its investigation of S&P started in 2009, well before the downgrade. S&P didn’t meet its burden to provide evidence that the lawsuit, alleging the credit rating company lied about the independence of its ratings, was retaliation for the downgrade, the Justice Department said.
Without such evidence, S&P isn’t entitled to the information it seeks about the Justice Department’s decision to sue and internal communications in other government offices, according to the Feb. 17 filing.
Rep. Scott Garrett, a New Jersey Republican, sent a letter dated Feb. 20 to Terrence Checki, executive vice president at the Federal Reserve Bank of New York, asking for clarification of Checki’s alleged involvement in Geithner’s dealings with S&P.
Checki contacted McGraw on Aug. 7, 2011, to tell him to get in touch with Geithner and said the Treasury Secretary was “very angry at S&P,” McGraw said in a Jan. 20 affidavit, according to the letter.
“Was there, to your knowledge, a concerted effort by Secretary Geithner or other federal agencies to intimidate S&P to avoid a downgrade?” Garrett wrote in the letter. “Do you have any knowledge of any effort by the federal government to punish or make an example of S&P? Was similar intimidation used to prevent other rating agencies from downgrading the U.S.?”
Andrea Priest, a spokeswoman for the New York Fed, declined to comment on the letter.