Feds Downgrade S&P

The AAA-dishing firm is accused of giving bad ratings

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Bruce Gilden / Magnum

Less than two years after Standard & Poor's downgraded the U.S. government's credit for the first time, the feds have turned the tables. In a civil lawsuit, the Justice Department accuses the ratings agency of fraud for misgrading bonds backed by crummy mortgages--"liar loans" and such--with sterling AAA ratings to please the bond creators who paid S&P's bills. Credit unions, along with institutions like pension funds, piled into these bonds, which lost value rapidly when real estate markets collapsed, helping ignite the 2008 recession.

S&P, one of several major credit-rating agencies, denies any culpability, and its defense will likely be based on the notion that its opinions reflected its "current best judgments" and that other expert institutions, including the Federal Reserve, also failed to see the housing crash coming. It's a variation of an earlier defense: We're all grownups here, and investment professionals could have disregarded S&P's opinion. Prosecutors will probably point to e-mail evidence showing conflicts within the agency at the time. "Let's hope we are all wealthy and retired by the time this house of cards falters," reads one e-mail unearthed by congressional investigators.

So far, lawsuits along these lines haven't had much success. (The Second Circuit Court of Appeals bought S&P's argument that its ratings were protected as speech.) But the Justice Department lawsuit is sure to put other ratings agencies on notice, and not just for their shabby grades. One S&P lawyer, Floyd Abrams, alleges that the government intensified its investigation of S&P after the downgrade of U.S. bonds in 2011.

In the meantime, the underlying problems remain. Ratings agencies still get paid by the firms that issue the securities being rated. No financial reforms post-meltdown have resolved this conflict.

Budget Battles: Lower Deficits, Rising Tempers

After a brief hiatus, President Obama and House Speaker John Boehner returned to their old postures: threatening economic harm to the nation if they do not get their way on deficit reduction--this time by way of $1 trillion in poorly planned automatic spending cuts set to take effect on March 1. Obama wants to replace the blanket cuts with a mix of targeted reductions and tax increases. Boehner just wants more targeted cuts. In the meantime, the Congressional Budget Office released some good news: whatever happens, the 2013 deficit should be the lowest since 2008. The bad news? It's $845 billion.


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The financial collapse (or the Great Recession) takes it toll





Congress invents the $1 trillion sequestration it hopes never happens












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