S&P Lawsuit Settlement Doesn't Address Real Issue of Asset Inflation
By Staff News & Analysis - February 05, 2015

S&P settles suits over crisis-era mortgage ratings … Credit-rating firm Standard & Poor's will pay $1.5 billion to resolve a collection of lawsuits over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis, concluding one of the U.S. government's most ambitious cases tied to the housing collapse. The settlement comes after more than two years of litigation as S&P tried to beat back allegations that it issued overly rosy ratings to win more business. – Washington Post

Dominant Social Theme: These agencies went rogue.

Free-Market Analysis: The suit is settled and presumably it's back to business as normal for S&P. The ratings agency stood accused of providing too-rosy ratings in order to gain clients.

Of course, S&P was not the only agency to provide ratings that looked overly optimistic after the great crash of 2008-2009. But S&P did something else that was quite controversial: It downgraded the rating of the US government.

Here's how Bloomberg reported on it back in August, 2011:

U.S. Loses AAA Rating at S&P on Concern Debt Cuts Deficient … Standard & Poor's downgraded the U.S.'s AAA credit rating for the first time, slamming the nation's political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at "negative" as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based firm said yesterday.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement late yesterday after markets closed.

… The U.S. immediately lashed out at S&P after the downgrade, with a Treasury Department spokesman saying the firm's analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn't elaborate, saying the mistake speaks for itself.

It has, of course, been suggested that the pursuit of S&P in part revolved around the US downgrade, but the settlement specifically included language, according to reports, that S&P acknowledged there was no evidence of retaliation involved in bringing the lawsuit.

Here's more:

S&P parent McGraw Hill Financial said it will pay $687.5 million to the Justice Department and $687.5 million to 19 states and the District of Columbia, which had filed similar lawsuits over the ratings.

The rating company reached a separate $125 million settlement with public pension fund California Public Employees' Retirement System, which sued S&P in 2009, claiming that its inaccurate ratings caused hundreds of millions of dollars in losses.

The lawsuit has been lingering since 2013 when settlement talks were halted with the US seeking $5 billion and accusing the agency of fraud. At the time, S&P argued the lawsuit was "retaliation for the firm downgrading the credit rating of the United States."

But settlement language specifically retracted these allegations, which Attorney General Eric H. Holder Jr. said were "utter nonsense."

The larger issue regarding S&P does not appear in reports on the settlement. That is how could S&P and other ratings agencies be so wrong about so many evaluated entities?

The entire Western financial infrastructure teetered on the verge of collapse in 2009. Fed chairman Ben Bernanke supposedly had to issue out something like US$15 trillion in short-term loans to shore up failing banking and industrial facilities.

The answer, of course, is that the system is not solvent nor can it be. While rating agencies were surely a good idea back when the West was more free-market oriented, today such agencies are evaluating risk involving companies that utilize currency created by monopoly central banks.

Such currency – and thus the companies that use it – cannot be seen as stable because the monetary system itself is fatally flawed. Thus, the ratings issued by agencies are in the longer term virtually meaningless.

Additionally, central banks trigger increasingly vicious business cycles that regularly threaten the solvency of even the larger entities. As ratings agencies apparently do not recognize the modern model of central banking as inherently flawed, a basic question arises: What good are they?

These agencies are literally avoiding the elephant in the room. The S&P lawsuit avoided dealing with this larger issue by accusing S&P of creating rosy ratings for the purpose of wooing business. But the real reason S&P was so wrong in 2008-2009 along with other agencies was because its model surely does not directly address the economic instability caused by the monopoly creation of currency.

Monopoly money creation hollows out a slew of otherwise sensible free-market solutions that were created long before central banking. Now they are almost useless but are preserved to give people a sense of "business-as-usual."

After Thoughts

Business-as-usual ceased in 1913, when the US Fed was created.

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  • Excellent

  • Danny B
  • Tom kauser

    Another history lesson? The treasury accused S&P of a 2 trillion dollar mistake in the accounting and nobody is concerned how they knew that?
    Should the Fed be accusing S&P and not the treasury accusing S&P? The Treasury audited itself when it gets its spending authorization from the FED?
    AT ONE TIME the money market was missing only 500 billion? I guess the numbers grow as much in the past as in the future following QE! Everybody just needs to move past all our past mistakes? Forgive and 4 get no harm no foul! Just get that rating back up ASAP!

  • Tom kauser

    On the day of the meltdown an unidentified party was accused by a Pennsylvanian Congressman of taking 500 BILLION out of the money market? This person was later identified as G.SOROS! This extraction was never investigated and now its 2 trillion?
    This reworking of history is organized and care is being taken to keep the Fed on the high road throne!

  • alaska3636

    DB: “The answer, of course, is that the system is not solvent nor can it be. While rating agencies were surely a good idea back when the West was more free-market oriented, today such agencies are evaluating risk involving companies that utilize currency created by monopoly central banks.

    Such currency – and thus the companies that use it – cannot be seen as stable because the monetary system itself is fatally flawed. Thus,
    the ratings issued by agencies are in the longer term virtually meaningless.”

    Hopefully, Mr. Johnston continues to stop by as no legitimate analysis of “modern” institutions can be constructed without asking the question: What are the various justifications and consequences of central banking activities?

    It is not a question; it is the question that underpins all others regarding the organization of human action.

    Many libertarians engage in hypothesizing a world which would develop in the absence of state force; but, the light of human action is more appropriately shone on the past and the present in which state force (and, especially, central banking) has shaped the flow of capital, and consequently the institutions, the experience and perceptions of all of those who, passively or actively, bear witness.

    Human action teaches us that the future is uncertain; but the past needs to be understood in light of the ideas that helped to shape it.

    Fatal flaws need not be permanent.

  • Praetor

    WOW, just in time for 3% down mortgages again. Take the stamp out of the draw, the one that says AAA rating and get to it. Come on Standard & Poor’s, you can get your associates to stamp 500 mortgages a day, we know you can, because the Standard should be everybody most be Poor and Bankrupt.

  • Danny B

    This is off topic but, VERY important,, to me. The export numbers show GB losing a lot of gold. The London bankers are in London and the ECB is in Brussels. Belgium wants it’s gold back, “The date of the retrieval operation is kept secret for security reasons,
    according to RTBF. A ship with 50 soldiers and a helicopter will escort
    the ingots to Belgium.
    Read more:

    This is definitely a vote of no-confidence in London. It also represents a growing awareness of the importance of gold. It also shows that desperation is setting in here and there.
    There is another item in the news that I don’t understand clearly. Russia has their new payment system up and running. I’m not clear if the transactions will be reported through FACTA / SWIFT or not.

    FACTA only benefits U.S. GOV, not Russia. If the new payment system is outside FACTA / SWIFT, Russia will attract a LOT of capital. The sanctions have only knocked .5% off their GDP while doing great damage to the tight-oil business in America. The dolts in D.C. seem impervious to the consideration of unplanned side effects.