DoJ lawsuit against S&P even sillier than first thought

I wrote Tuesday about the hypocrisy and perhaps vindictiveness of the Department of Justice’s lawsuit against ratings agency Standard & Poor’s for rating toxic mortgage-backed securities and their derivatives highly before the housing bubble popped.  Apparently I wasn’t tough enough on … the DoJ.  Bloomberg’s Jonathan Weil explains why the lawsuit isn’t just ill-considered, but downright silly:

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Oh, the poor suckers at Citigroup Inc. and Bank of America Corp., fooled about the stench of their own garbage by those sneaky credit raters at Standard & Poor’s.

The U.S. Justice Department made some peculiar allegations in its lawsuit this week against S&P and its parent, McGraw-Hill Cos. According to the government, Citigroup was defrauded by S&P credit ratings on subprime mortgage bonds that Citigroup itself created and sold. Bank of America, too, allegedly was defrauded by S&P in the same way. …

Under the government’s theory, Citigroup and Bank of America paid S&P for ratings that convinced the banks their own CDO offal was rock-solid. And because S&P deceived them into thinking the best of their own rubbish, these banks and other lenders suffered more than $5 billion of investment losses, according to the suit.

No, that’s not a joke.  Weil boils the lawsuit’s raison d’être down to this:

For nine of the CDOs, the government’s complaint listed Citigroup as the harmed investor — without mentioning that Citigroup’s investment-banking division had managed the bonds’ offerings. The complaint identified Bank of America as the defrauded CDO investor in two instances, also without mentioning that its securities unit underwrote those bonds.

It’s a novel concept. If only S&P had given honest opinions to Citigroup and Bank of America — which were paying S&P millions of dollars for ratings — then the banks would have realized they were buying ticking time bombs from themselves. And who knows? Maybe they could have found some other hapless chumps to immolate instead, if S&P had told them in time.

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Notably, neither Citi nor BofA are suing S&P over this issue, nor are they talking on the record.  They aren’t the only victims claimed by the DoJ — M&T Bank is also listed, and they didn’t produce any of the products in which they invested.  The fact that none of these entities are pursuing damages from their own bad bets on mortgage-backed securities and their derivatives probably should give a clue as to the validity of the claims being made by the DoJ.

So far, though, it’s just the Obama administration pursuing the rather laughable claim that S&P’s ratings would have made any difference to Citi and BofA on their own products.  Combine that up with the fact that this is the only ratings agency that the DoJ has pursued after the financial collapse in 2008, and it’s the most significant one that downgraded US credit while Obama has been President, and the actual raison d’être seems pretty clear.

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