Where they are intelligently constructed, government ethics rules prevent both impropriety and the impression of impropriety, which, in an open society with institutions that are necessarily based on trust, are almost equally damaging. For example, former Virginia governor Bob McDonnell may in fact convince a jury that he broke no law, but his acceptance of gifts including a Rolex timepiece and what appears to be an entire Louis Vuitton accessories – shoes, bag, outerwear, wallet — will leave Virginians with the not unreasonable impression that gubernatorial relationships can be bought. Likewise, Treasury secretary Timothy Geithner’s promising to rain vengeance upon the Standard and Poor’s credit-rating agency in retaliation for its downgrading U.S. credit may not be illegal, but it must bring into question the subsequent prosecution of the firm.
A refresher: Standard and Poor’s, despairing at the outcome of yet another half-baked Washington budget deal, wrote that the current political situation left the country fiscally “less stable, less effective, and less predictable.” It then downgraded U.S. sovereign debt one step from its previously unassailable AAA rating. The Obama administration was none too pleased that it was to go down in history as the regime under which the United States lost its AAA rating, and Secretary Geithner three days later phoned up S&P to dress down its executives for the move, warning them that the firm would be “looked at very carefully,” as chief executive Harold McGraw relates in court filings, adding that Geithner warned that “such behavior could not occur without a response from the government.”
S&P, in retaliation for being too strict with Uncle Sam, promptly was accused of fraud for being too generous in its assessment of certain mortgage-backed securities in the lead-up to the 2008–09 financial crisis. S&P claims that it is being singled out in retaliation for its downgrade of government credit. Secretary Geithner, since returned to private life, by his thuggish actions suggests that that may be the case. His threats at the very least muddy the ethical waters, and they are not an isolated event: Given the other abuses that occurred within Geithner’s Treasury Department — notably the IRS’s targeting of the Obama administration’s political enemies — fair-minded people might be inclined to give S&P a sympathetic hearing.
This is not to defend S&P’s corporate actions, which were in fact indefensible. Its rating standards were literally a joke — its agents famously jested that they would rate deals “structured by cows” and prayed that they would all be “wealthy and retired” before the “house of cards” that was the housing bubble came crashing down. But S&P, like any credit-rating agency, is largely in the business of giving opinions, and if it is a crime to offer harebrained opinions about matters of some public import shaped by a combination of self-interest and incompetence, then we are going to have to lock up most of the op-ed-page editors in the country and set up a secure perimeter around MSNBC. That S&P is being prosecuted for making insufficiently vetted statements by the minions of President If-You-Like-It-You-Can-Keep-It is a sign of the times.
The federal case charges that S&P committed fraud because it falsely claimed that its assessments were “objective.” We might say the same thing about the New York Times. As the constitutional lawyer Floyd Abrams put it, “both the newspaper and S&P are offering opinions on matters that people can and do disagree about.” Unhappily, the aggressors have been making some advances in the ongoing war against the First Amendment, which the Obama administration and its enablers are happy to trample upon when it suits them politically, and credit-rating agencies have had scant legal success defending themselves on free-speech grounds.
This is in no small part a case of scapegoating. The credit-rating agencies played a role in the financial crisis, but a minor one — and an insignificant one compared with that of federal housing and financial policy. It was, after all, the federal government that created a federally chartered cartel of credit-rating agencies and mandated their use by financial firms. It did this in order to relieve itself of the burden of conducting credible surveillance on the portfolios of those firms. Rather than have its regulators do roughly the job that bank inspectors did for generations — evaluating risks within financial firms — Washington punted, passing risk regulations and deputizing the (incompetent, as it turns out) credit-rating agencies to sign off on risk ratings.
If in fact this action constitutes retaliation against the firm, then the Obama administration’s actions are an order of magnitude worse than the worst that S&P is accused of doing.
Politics and finance have a symbiotic relationship, each influencing the actions of the other. But only the politicians have the police power, which is why political operators such as Secretary Geithner, his colleagues, and his predecessors have never been called to account for their role in the financial crisis. It is also why we apply a high standard of conduct to their actions. Those who are asked to judge whether the case against S&P represents justice or a political vendetta must factor into their calculations that the Obama administration’s credibility rating is something less than AAA.