Good News and Bad News for Embattled Standard & Poor's Rating AgencyPaul M. Barrett
A federal judge in California has given Standard & Poor’s a boost in the rating agency’s attempt to fend off a $5 billion Department of Justice fraud lawsuit stemming from the 2008 financial crisis. That’s the good news for S&P, which contends that the suit represents craven payback by the Obama administration for the agency’s 2011 downgrade of U.S. government debt.
The less good news for S&P is that, according to Brazilian media reports, a former senior employee of the agency in Brazil faces serious financial corruption allegations. Adding a certain spice to the Brazilian situation, S&P downgraded the country’s credit rating in March.
Let’s break down these apparently unrelated but equally fascinating developments. On April 15, U.S. District Judge David Carter ordered the Justice Department to provide documents relevant to S&P’s contention that the government sued it last year for issuing supposedly fraudulent ratings of mortgage-backed securities in retaliation for S&P’s having downgraded the U.S. credit rating in 2011. S&P’s lawyers have argued that the Obama administration singled it out for condemnation even though rival agencies Fitch Ratings and Moody’s Investors Service issued similarly flawed ratings that failed to anticipate the Wall Street crash.
Carter ruled that S&P was entitled to find out whether the administration’s angry reaction to the downgrade contributed to the decision to sue only S&P. The judge cited an August 2011 phone call allegedly placed by then-Treasury Secretary Timothy Geithner to Harold McGraw III, the chairman and chief executive officer of McGraw-Hill, S&P’s parent company. In a sworn affidavit, McGraw said that Geithner deplored the downgrade as wrongheaded and unpatriotic. Carter said S&P deserved access to documents that might shed light on whether Geithner’s pique, as McGraw has described it, had any connection to the subsequent decision to sue S&P.
The Obama administration and Geithner have denied selectively going after S&P or any other wrongdoing. The Justice Department has repeatedly said that its 2013 suit was based exclusively on evidence showing that S&P knew its ratings were inflated. The department asserts that S&P tried to curry favor with banking clients by pumping up ratings of bonds the banks issued—an accusation S&P denies. Instead, S&P insists that its ratings were merely incompetent, not dishonest.
If S&P can prove a Justice Department revenge plot, that would defuse the government suit and expose administration officials—current and former—to allegations that they, not S&P, committed misconduct. Stay tuned on all that.
Meanwhile, down in Brazil, more intrigue. Brazilian media reports say that Milena Zaniboni, a former managing director for corporate and government ratings in Brazil, has been indicted by the federal police there on suspicion of money laundering. The Brazilian reports do not discuss Zaniboni’s past role with S&P, and there is no indication that the allegations against her related in any way to her employment with the U.S.-based rating agency. It isn’t clear from these reports when exactly Zaniboni left her post at S&P. Lawyers for ther family deny any wrongdoing, according to the Brazilian reports. For more detail, consult this January dispatch from the Portuguese-language website of the newspaper Folha de Sao Paulo.
Hoping for an explanation of what’s happening in Brazil, I contacted Edward Sweeney, S&P’s spokesman in New York. “In the interest of the privacy of our employees and former employees, we do not discuss employment matters,” he responded via e-mail. In a follow-up phone conversation, he declined to elaborate for this article but didn’t dispute the Brazilian reports.
In March, S&P cut Brazil’s credit rating one level, to BBB-, its lowest investment-grade rating. “The downgrade reflects the combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the October presidential elections, and some weakening in Brazil’s external accounts,” S&P said in a report.
Bloomberg News had this analysis in the wake of the S&P action on Brazil:
“The S&P downgrade was way, way overdue,” Michael Shaoul, the chairman and chief executive officer of Marketfield Asset Management LLC, which oversees more than $20 billion, said by phone. “If they downgraded Brazil 12 months ago, they would have had something useful to tell people. They waited so long that everybody had worked out what was going on.”
Fitch and Moody’s rate Brazil one level higher than S&P does, according to Bloomberg News.