Fox Forwards Claim That Government Seeks “Retribution” In S&P Lawsuit

Multiple Fox News personalities have suggested the Justice Department's lawsuit against Standard & Poor's is 'political retribution,' either papering over or outright ignoring the facts behind the suit. However, the S&P investigation began well before U.S. credit was downgraded, and a raft of internal emails suggest the company may have knowingly inflated securities ratings.

Fox Figures Advance “Government Retribution” Narrative

Varney and Andrew Napolitano Agreed That DOJ Lawsuit Is “Retribution.” On the February 5 edition of Fox Business' Varney & Company, Varney and guest Andrew Napolitano speculated as to whether the Justice Department's lawsuit was a form of “political retribution.” Napolitano, who admitted he is “skeptical of almost everything that the government does,” noted that while there is “nothing in the complaint that would lead you to believe it's retribution,” the suit “certainly appears as though it's retribution.” Varney went on to say, “I think it is political retribution, but that is an opinion of mine. And I think perhaps you share it.” Napolitano replied: “I share that view as well, and I lament the fact that the government can do this and get away with it.” [Fox Business, Varney & Company, 2/5/13]

Frequent Fox Guest Peter Morici: DOJ Lawsuit “Creates The Appearance Of Sovereign And Political Abuse.” In his column, economist and frequent Fox guest Peter Morici wrote that while prosecutors frequently single out companies “to obtain damages and reforms,” DOJ's sole selection of S&P, to the exclusion of the other two major credit rating agencies, “certainly creates the appearance of sovereign and political abuse,” as well as “the appearance of retribution.” [, 2/5/13]

Fox News' Your World Covers S&P Suit: “Undoubtedly” Retribution, Just One “Stupid,” “Jokey Email” From “One Analyst” At Heart Of Charges. On the February 5, 2013, edition of Fox News' Your World with Neil Cavuto, guest host Stuart Varney had the following exchange with Fox Business host Melissa Francis and Fox News legal correspondent Mercedes Colwin:

STUART VARNEY: Attorney General Eric Holder announcing a lawsuit against Standard & Poor's. The suit, which seeks $5 billion in damages, claims S&P's high rating on risky mortgage investments brought the financial system to the brink of collapse. Why just S&P? Why not other rating agencies? No. It is just S&P. The same firm that had the temerity to downgrade our debt. Critics already crying foul, claiming that this latest move is nothing more than political retaliation. Well is it? We are on it with Fox News legal analyst Mercedes Colwin and Fox Business Network's Melissa Francis. Mercedes, to you first. Do you think this is political payback for the downgrade last year? 

MERCEDES COLWIN: I think undoubtedly. There were several credit agencies that were involved. In fact there was a commission report in 2011 that said credit agencies were the enablers that led to the fiscal crisis. They didn't say S&P. Well there's S&P, there's Moody's, there's Fitch. All of these credit agencies provided their opinions on these toxic mortgage bundles that were then obviously sent over to investors  and led to the collapse that we have today.


COLWIN: But with a lawsuit you put in all the parties that you suspect may be responsible. You just don't pick and choose. This is a civil lawsuit, not a criminal one, so if he's talking about civil fraud damages, bring in the parties that could [be] responsible. S&P, Moody's, Fitch, and during discovery, during the exploration, that's where you can make a decision.

VARNEY: I want to get the substance of the charge. Melissa, you read the documents. Does the Justice Department have a case? 

MELISSA FRANCIS: I mean I think there's a reason they're focused on S&P because there's a stupid e-mail and song at the heart of this. I mean once again you have an analyst who was dumb enough to put it all down in an e-mail. They made up a song to Burning Down the House, talking about the mortgage market, and sent it around and even said I'll go over to your cube and perform it for you. So there's the smoking gun saying that the market is overheated, that they know that this isn't - that they suspect this isn't going to work out the way everyone thought it was going to.

VARNEY: So one analyst sends a jokey e-mail?

FRANCIS: They call him I believe it's Analyst D in the document and he talks about what he knows and it really foreshadows everything that's coming. So I mean I agree with you that all the rating agencies are to blame. The model doesn't work, where you're paying a rating agency to come in and make the rating. There's a huge conflict of interest here. But it may be this e-mail that sinks S&P. [Fox News, Your World with Neil Cavuto, 2/5/13]

But DOJ Investigation Pre-Dates U.S. Credit Downgrade

CBS: Investigation Started Years Ago. While discussing the Justice Department's lawsuit against S&P, CBS correspondent Anthony Mason noted that investigations take years to conduct, and that this particular one began in 2009:

MASON: Investigators tell me typically these complicated cases take years to build. I mean, this investigation began in 2009, and in this case, the government has had to go through 20 million pages of internal Standard and Poor`s documents. [CBS Evening News, 2/5/13, via Nexis]

WSJ: Government Has Been Investigating S&P For Years. In its article on the lawsuit, The Wall Street Journal reported: “For about three years, the government has been investigating whether S&P managers pushed to weaken company standards for rating mortgage-linked deals or ignored the standards entirely, people familiar with the probe said.” [The Wall Street Journal, 2/5/13]

Evidence Suggests S&P May Have Engaged In Fraudulent Activity

WSJ: Internal S&P Emails Show Company Officials Knew How Risky Mortgage-Backed Financial Devices Were. From an August 2008 article in The Wall Street Journal:

In one email, an S&P analytical staffer emailed another that a mortgage or structured-finance deal was 'ridiculous' and that 'we should not be rating it.' The other S&P staffer replied that 'we rate every deal,' adding that 'it could be structured by cows and we would rate it.'

Meanwhile, an analytical manager in the collateralized debt obligations group at S&P told a senior analytical manager in a separate email that 'rating agencies continue to create' an 'even bigger monster -- the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters.;O) [The Wall Street Journal, 8/2/08, emphasis added]

WSJ: Emails Show S&P Adjusted Ratings Criteria To Satisfy Wall Street Firms. From an August 2008 article in The Wall Street Journal:

But satisfying Wall Street issuers also crept into the process. 'We are meeting with your group this week to discuss adjusting criteria for rating CDO's of real-estate assets...because of the ongoing threat of losing deals,' S&P commercial mortgage analyst Gale Scott wrote to colleagues in August 2004, according to the draft report and a person familiar with the situation.

Richard Gugliada, a former S&P official who replied to Ms. Scott's email, said he recalls that commercial-mortgage rating criteria were changed slightly after several meetings on the subject. Ms. Scott, who still works at S&P, couldn't be reached for comment. [The Wall Street Journal, 8/2/08]

Bloomberg Businessweek: Evidence Suggests S&P Knowingly Published Unrealistic Ratings Of High-Risk Tranches Of Debt. In a September 2011 article about the federal government's investigation into S&P, Bloomberg Businessweek reported:

In e-mails released by the Senate investigations panel led by Michigan Democrat Carl Levin, some S&P analysts questioned whether the Delphinus bonds deserved top grades. The analysts said the securities backing the deal were different from what bankers had described, according to the report.

“Um ... looks like the remaining portion is actually all sub-prime,” S&P analyst Lois Cheng wrote.

“Do you want to address this with them, or let it go?” Lauren Sprinkle, another S&P analyst, replied. “Hey, let the higher ups handle this,” Shannon Mooney, another analyst, wrote, according to the e-mails.

The e-mails also signaled that S&P employees were aware that a technicality had allowed Delphinus to skirt new rules at S&P that would have negatively affected its rating. The rules, which took effect a day before the Delphinus deal closed, were aimed at making such ratings more conservative, reflecting the firm's expectation of imminent downgrades of mortgage-linked securities.

Delphinus, like several other CDOs, was created using “dummies,” indicative securities used as placeholders, according to the e-mails. S&P had rated Delphinus based on the dummies rather than the actual securities, which weren't acquired until the deal closed. A rating based on the actual securities would have been notched lower under S&P's new protocol, according to the e-mails. The analysts later discussed whether the new rules should have applied to Delphinus, the e- mails show. [Businessweek, 9/27/11, emphasis added]

Fortune: According To DOJ Evidence, S&P Executives In January 2007 Elected To Profit From Impending Crisis Rather Than Blow The Whistle. From Fortune:

According to the DOJ, in early 2007, S&P suspected that the housing market was going to implode and that there would be millions of defaults and foreclosures. The executives even held a meeting in January 2007 about 'the housing bubble,' and what to do about it. The response you would hope for would be to blow the whistle, own up to your mistakes and tell investors to run for cover. But that's not what S&P did. According to the DOJ, S&P executives came to the conclusion that Wall Street was going to want out of all those subprime mortgage loans and bonds that the banks had held onto, and that they could make a lot of money helping them. [Fortune, 2/6/13]

Fortune: S&P Analyst Emailed Song Parody Premised On Impending Meltdown In Subprime Debt To Coworkers. In an article on the lawsuit, Fortune reported: “In early 2007, a Standard & Poor's analyst who had just completed an analysis of the firm's recent ratings of mortgage bonds sent an e-mail to his colleagues with a parody of the Talking Head song Burning Down the House. One line: 'Subprime is boi-ling o-ver, Bringing down the house.' Shortly after, the analyst wrote back asking people not to forward the e-mail, worried it would make him look bad. Instead he offers, 'If you're interested, I can sing it in your cube.' He later made a video.” [Fortune, 2/6/13]

Fortune: DOJ Suit Alleges S&P Proposed Stricter Ratings Model In 2004 But Decided To Retain Lenient Model To Make More Money. From Fortune:

A good portion of the bad behavior appears to be driven by one key decision that the executives at S&P made, and were unwilling to correct, back in 2004. The executives seemed to realize that S&P's model for rating mortgage bonds was too lenient. So they proposed an upgrade with stricter ratings criteria. They held a meeting and drew up new guidelines. They even signaled to clients that they were going to make the switch. And then nothing. The upgrade was dropped.

One executive who complained about it to his superiors got two responses. First, stop documenting your concerns in e-mails. And second, our analysis suggests that doing the upgrade won't boost our market share or revenue so we aren't going to spend money on it, which at least in a business context seems kind of reasonable.

At least at first. But, according to the DOJ, sometime in early 2007, S&P's faulty rating system morphed from something that could cost them business if it were made stricter to something that was actually creating new business, and bonds, and eventually investor losses, that wouldn't have normally existed without S&P. And that's where S&P's alleged actions cross over from looking bad to actually being bad. [Fortune, 2/6/13]

Experts: S&P Lawsuit May Initiate Suits Against Other Ratings Agencies

Industry Lawyer: S&P Lawsuit May Spur Similar Charges Against Moody's. In a recent Bloomberg article, lawyer Robert Piliero explained that while the Justice Department is currently only targeting S&P, that lawsuit may be used as a way to bring litigation against other ratings agencies. From Bloomberg:

The U.S. is seeking as much as $5 billion in penalties from New York-based McGraw-Hill as punishment for inflated credit ratings that Attorney General Eric Holder said were central to the financial crisis. While Moody's wasn't sued, a victory by the government would spur other lawsuits, according to Robert Piliero, a lawyer at Butzel Long in New York who's worked on structured-finance litigation. [Bloomberg, 2/5/13]

Huffington Post: S&P Lawsuit Could “Serve As A Template” For Future Action. In an article explaining the action taken by the Justice Department, The Huffington Post reported "[e]xperts said the lawsuit could serve as a template for future action against Fitch and Moody's, the other two major credit rating agencies."