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The Government's Nutty Suit Against S&P

 February 07, 2013 01:18 PM


If I'm getting this right, the Department of Justice is suing Standard & Poor's for failing to foretell the future correctly. If that's so, heaven help us all; the only one safe from Eric Holder now is Kreskin.

This lawsuit by the government is preposterous. You'll get no argument from me that the rating agencies (all of them; not just the one the Justice Department singled out) were key players in bringing on the housing debacle and ensuing credit crunch. If the agencies hadn't slapped triple-A ratings on all those misbegotten portfolios of subprime paper the investment banks kept churning out, no one would have bought them. A huge spigot of cash that ended up flooding into the housing market would have thus stayed shut. We now know that would have been a very good thing.  

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But S&P committed fraud? No. It is one thing for the agencies to have failed to see the housing bust coming. Lots of people missed it, including (ahem) the people who ran the O.C.C., the F.D.I.C., the S.E.C., and the Fed. The DoJ alleges, though, that S&P didn't just miss the bus, but rather "knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in" securities back by subprime mortgage loans. I have a simpler explanation for what happened. "Never attribute to malice that which is adequately explained by stupidity," goes the old saying. That piece of wisdom was never more apt than here. The people at the rating agencies weren't crooks. They were fools. They really believed their fancy computer models could accurately predict how a one-in-a-lifetime asset bubble would play itself out once the popping occurred. It turns out they were wrong.

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Nor are the supposedly incriminating internal S&P e-mails the government trotted out in its filing, about "bringing down the house" and "ridiculous" deals, as incriminating as we're supposed to think. All the e-mails show is that honest, vigorous debate really was going on within the agency regarding the securities' creditworthiness. That's the way the process is supposed to work. That's no evidence of conspiracy and fraud. It's just the opposite. 

One last thing: the fact that S&P, the only agency that's downgraded Treasury debt, is the only agency being sued creates a distinct impression that politics played a role in the Justice Department's decision. No one argues that S&P's basic method for rating these deals was any different from the other rating agencies'. If what S&P did was so bad, let DoJ sue the other agencies, too! But it didn't. This doesn't looks like justice to me.

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