Let’s withhold judgment on DOJ’s suit against Standard & Poors

I don’t believe we’ve written about the Obama Justice Department’s suit against Standard & Poors, which alleges that S&P manipulated bond ratings for its own purposes. Actaully, there’s good reason not to write about it, since we don’t have access to the evidentiary record on which the DOJ is relying.

This hasn’t stopped some from opining. For example, Robert Samuelson, a columnist I respect, has denounced the suit, asserting that S&P is a “scapegoat” and that “the Department of Justice has become the Department of Blame.” He writes:

The Obama administration’s suit against the rating agency Standard & Poor’s makes for riveting headlines and lousy history. We want to blame the financial crisis and Great Recession on greed and dishonesty. The charge that S&P rigged bond ratings for its own gain — providing artificially high ratings on the mortgage-backed securities that inflated the credit bubble — fits this self-serving morality tale. The discomforting reality is that the financial collapse resulted from an extended period of prosperity, which led to weakened credit standards and inspired wishful thinking about the permanence of economic growth.

But S&P may have violated the law even if its actions did not cause of the financial collapse. To say, as Samuelson does, that the collapse is rooted in “the mass psychology of prolonged prosperity” is not to refute the claim that individual actors acted corruptly and unlawfully.

In Reckless Endangerment, Gretchen Morgenson and Joshua Rosner present a plausible case that rating agencies like S&P knowingly inflated their ratings of dubious financial instruments in order to compete for the business of those issuing the instruments. Whether the record supports such a claim to the level needed to justify the Justice Department’s lawsuit is another matter. As I said, I’m not able to offer an opinion on that question.

Reckless Endangerment suggests that the practice at issue was not confined to S&P. Yet so far, the DOJ not sued other rating agencies. This has fueled speculation that the Obama administration is retaliating against S&P, perhaps for its decision to downgrade the nation’s credit rating.

However, at this stage we don’t know (1) whether DOJ will file other suits and (2) how the strength of other potential suits compares to that of the action against S&P. So again, it is premature to draw conclusions from the absence of suits against, say, Moody’s. Skepticism over the motives and impartiality of the Obama/Holder Justice Department is understandable, though.