Suit Against S&P Looks Suspiciously Political

Original Article

Ulterior Motives in the DOJ Suit against S&P?

What has been distinct about Barack Obama’s presidency is his inclination to operate in continuous campaign mode, to deflect attention away from his policy failures and to undermine opposition by politicizing the issues and policy responses he chooses to take up.

So now with the president’s attorney general Eric Holder having just announced the filing of a $5 billion DOJ suit against Standard & Poor’s — charging that fraudulent ratings were made on risky mortgage bonds that went into default during the financial crisis of 2008 — one has to wonder what the political motivation might be.

First, why now? Why has it taken four years for the Obama Administration to bring this case?

Second, why is it that S&P is singled out for alleged wrongdoing, when Moody’s and Fitch did the very same things in assigning top ratings to similar classes of dodgy mortgage securities? The plausible answer is that it’s all about political calculation to manipulate perception and outcome on the central issue of our time.

President Obama has been reminded from multiple quarters that the deficit spending and debt accumulation during his administration have the potential to undermine his legacy and precipitate a major financial crisis.

Surely someone in the White House has paid attention to the various reports on the state of the U.S. government debt rating, issued from all three credit rating agencies during the last few years.

A January 2011 Moody’s report noted that the ratio of national debt to national tax revenue in the United States is the worst of all the AAA-rated countries in the world.

While the European debt crisis got more news coverage than the one brewing at home in the last three years, the U.S. fiscal condition has deteriorated to the point where its debt to revenue ratio is nearly three times higher than the AAA median, and more than twice that of Germany, the U.K., the Netherlands, Switzerland and Canada.

Later in 2011 Moody’s and Fitch hedged their AAA ratings of U.S. Government debt — issuing negative outlooks.

But it was S&P that took the heat in August of that year, being first to actually cut the nation’s rating to AA+.

The U.S. then became split-rated Aaa/AA+. At the time the Obama administration lashed out at S&P, launching an unprecedented attack, specifically accusing the agency of “misleading calculations.”

A year later, on Sept. 11, 2012, Moody’s announced that it expected to lower its AAA rating on U.S. government debt if budget negotiations failed to “produce a stabilization and then downward trend in the ratio of federal debt to GDP.”

On Jan. 15, 2013, David Riley, managing director of Fitch Ratings Global Sovereigns division told a London conference, “the pressure on the U.S. rating, if anything, is increasing (and) fundamental credit strength (is) being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt.”

Some speculate that Obama’s DOJ suit against S&P is to get revenge because of its downgrade of the U.S. a year and half ago.

But Obama is less concerned about settling scores than he is about gaining political advantage.

First, he wants to deflect attention away from his failed leadership on budgetary matters resulting in record deficits and alarming debt accumulation as the debate over the sequester and debt ceiling heats up in coming weeks.

Second, and perhaps more important, the DOJ suit serves to blackmail Moody’s and Fitch — inhibiting them from proceeding on official downgrades on U.S. government debt and thereby saving Barack Obama from the historical ignominy of the president who lost America’s AAA rating.

Washington is increasingly defined by hubris, but in the end financial markets will overrule politics.

Politically contrived AAA ratings on U.S. government debt will no more hold up the markets for U.S. Treasury bonds and the dollar than did the falsely rated mortgage securities hold up the banking, housing and mortgage markets in 2008.

Unfortunately, the magnitude of this next crisis would make the previous look like a cakewalk.

Scott S. Powell

Senior Fellow, Center on Wealth and Poverty
Scott Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 250 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.