Geithner Said U.S. Would Respond to Downgrade, S&P Says

Former U.S. Treasury Secretary Timothy F. Geithner
Former U.S. Treasury Secretary Timothy F. Geithner told McGraw according to the filing, “S&P’s conduct would be looked at very carefully.” Photographer: Andrew Harrer/Bloomberg

Former U.S. Treasury Secretary Timothy Geithner told McGraw Hill Financial Inc. Chairman Harold W. McGraw III in 2011 that Standard & Poor’s downgrade of the U.S. debt would be met by a response, S&P said.

S&P filed a declaration by McGraw yesterday in federal court in Santa Ana, California, as part of a request to force the U.S. to hand over potential evidence that the company said will support its claim that the government filed a fraud lawsuit against it last year in retaliation for its downgrade of the U.S. debt two years earlier.

In his court statement, McGraw, 65, said Geithner called him on Aug. 8, 2011, after S&P was the only credit ratings company to downgrade the U.S. debt. Geithner, McGraw said, told him that S&P would be held accountable for the downgrade. Government officials have said the downgrade was based on an error by S&P.

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

The Justice Department last year accused S&P of lying about its ratings being free of conflicts of interest and may seek as much as $5 billion in civil penalties for losses to federally insured financial institutions that relied on the company’s investment-grade ratings for mortgage-backed securities and collateralized-debt obligations, or CDOs.

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.

S&P Downgrade

S&P has said the government’s fraud allegations are without merit. The company has also disputed that its downgrade of the U.S. was based on any error.

In August 2011, S&P downgraded the U.S.’s 60-year-running AAA credit rating to AA+ with a negative outlook.

In its request to compel the Justice Department to hand over the evidence, S&P said 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 its decision to sue Standard & Poor’s.

Natalie Earnest, a spokeswoman for the Treasury Department, referred questions about S&P’s filing to the Justice Department.

‘No Connection’

There’s absolutely “no connection” between the downgrade and the lawsuit, Ellen Canale, a spokeswoman for the Justice Department’s Financial Fraud Enforcement Task Force, said today in a phone interview.

“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 e-mailed statement.

In its request yesterday to U.S. District Judge David Carter for an order that the Justice Department hand over documents for its “retaliation defense,” S&P said the government was initially investigating all three major credit rating companies, including Moody’s Corp., and focused on S&P exclusively after the McGraw Hill unit downgraded U.S. debt.

A Justice Department official who asked not to be identified because of the pending lawsuit said the government’s investigation of S&P predates any alleged comments Geithner made to McGraw.

Comments Unmentioned

Lawyers involved in bringing the case had no knowledge of the alleged comments and S&P never mentioned them during the 2 1/2 years since they were allegedly made, the person said.

Ed Sweeney, a spokesman for New York-based S&P, declined to comment on the official’s comments.

“We are simply asking the court to order the government to provide the discovery S&P is entitled to so it can properly defend itself against these meritless claims,” he said in an e-mailed statement.

“S&P reviewed the same subprime mortgage data as the rest of the market including U.S. Government officials who publicly stated that problems in the subprime market appeared to be contained,” Sweeney said. “Additionally, S&P’s ratings on the CDOs in question were substantially the same as those provided by the other rating agencies, yet the government has chosen to charge just S&P.”

The case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).

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