S&P Blames a Vengeful Timothy Geithner for Its Legal Woes

Geithner promoting Stress Test on Good Morning America Photograph by Lorenzo Bevilaqua/ABC via Getty Images

Timothy Geithner is taking a victory lap, promoting his book, Stress Test: Reflections on Financial Crises. The memoir describes his tenure as Treasury Secretary in the aftermath of the great Wall Street collapse of 2008.

Now president of Warburg Pincus, a private-equity firm in New York, Geithner, 52, has received mostly respectful reviews (New York Times here), the main theme of which my colleagues at Bloomberg View expressed thusly: “Geithner, acting in concert with Federal Reserve Chairman Ben Bernanke, managed an impossibly difficult situation pretty well.”

Courtesy The Crown Publishing Group

Standard & Poor’s, however, seems not to have received the memo that this is a moment of collective hat-tipping toward Geithner. Defending itself against a $5 billion Justice Department fraud action that accuses the rating agency of helping cause the Wall Street meltdown, S&P insists that the civil suit is nothing more than an act of revenge motivated in part by … Timothy Geithner.

On May 13, S&P won a potentially important procedural round in its legal defense as a federal judge in California ordered Geithner to comply with the rating agency’s demand for documents it claims will show that the U.S. filed suit in retaliation for an S&P downgrade of government debt in August 2011. Bloomberg News provides the key background:

Harold W. McGraw III, chairman of S&P parent McGraw Hill Financial Inc. (MHFI), said in a court statement that Geithner called him days after S&P downgraded the U.S. debt in August 2011 and told him that the company would be held accountable for it. McGraw said Geithner told him there would be a “response” for the downgrade, which the government said was based on an error. Geithner is the highest former government official S&P has pursued for information to support its allegations. S&P, the only credit rating company sued by the Justice Department for allegedly giving fraudulent ratings to mortgage-backed securities, has said it was singled out because of the downgrade.

The Justice Department and Geithner have denied there is a connection between the downgrade and the lawsuit filed last year. The government has said it may seek as much as $5 billion in civil penalties from S&P for losses to federally insured financial institutions that relied on its ratings for mortgage-backed securities and collateralized-debt obligations, or CDOs, that lost value after the housing market collapsed. The call to McGraw took place right after Geithner had met with President Barack Obama, S&P said in February.

The May 13 order came from U.S. District Judge David Carter, who is presiding over the government’s suit against S&P. Carter denied Geithner’s request to set aside an S&P subpoena, as well as a similar request by the Federal Reserve Bank of New York. The judge said S&P had provided sufficient evidence of an “improper purpose” to warrant further disclosure and investigation. Jenni LeCompte, a Geithner spokeswoman, declined to comment, referring to an earlier Geithner denial that he threatened S&P or prompted any retaliatory action.

There’s much more to come in the U.S. v. S&P litigation, and Geithner could emerge blameless. One imagines, though, that this is not the breaking news event that his publisher hoped would accompany the release of Stress Test.

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