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Execs off the hook at S&P

The federal and state lawsuits against S&P are well and good, but no people are on the hook in these cases. What kind of deterrence is that?

February 09, 2013|Michael Hiltzik
  • Harold McGraw III is not named in the big government lawsuits alleging fraud at S&P. Who? He's the CEO, chairman and president of S&P's parent company.
Harold McGraw III is not named in the big government lawsuits alleging fraud… (Jim Watson, AFP/Getty Images )

You may have heard last week about a couple of big lawsuits brought by federal and state governments, alleging that the credit rating agency Standard & Poor's concocted a fraudulent scheme that contributed to trillions of dollars in investment losses and the cratering of pretty much the entire world financial system.

Those are serious charges, and the federal government's demand for $5 billion in penalties isn't peanuts. Yet there's something bloodless about the lawsuits, for the simple reason that they don't point the finger at any particular person who was responsible for these dastardly doings.

For example, you won't find the name Harold McGraw III anywhere in the court papers. Who?

McGraw was chairman, chief executive and president of McGraw-Hill, S&P's parent company, in the period at issue, 2004 to 2007. (He's still in place today.) Did he profit from S&P's wrongdoing? Let's assume so: he not only owns 10 million company shares but received $44.5 million in compensation over those years, according to corporate disclosures. Did he know or care about what was happening at S&P? One would hope so because it was by far the most profitable domain in his empire, contributing an average of more than 70% of McGraw-Hill's operating profit.

Harold McGraw's largest business unit engaged in an "egregious" fraud that "goes to the very heart" of the financial crisis, Atty. Gen. Eric H. Holder Jr. said. But prosecutors have made no effort to hold him, or anyone else, directly responsible for what was done at S&P.

These new lawsuits replay the only story uglier than the financial meltdown itself, which is the government's pathetic record at prosecuting the crimes that produced it.

For companies can't do things like manipulate numbers on spreadsheets, lie about their "independent" judgment, and fire employees who try to rectify such errors. Only people can.

In accordance with the government's standard approach to financial crisis justice, no flesh-and-blood people are on the hook in these cases. Only companies, which (more's the pity) can't be put in jail for their wrongdoing. Yet it's only people who can profit from such conniving.

The lawsuits name a few executives here and there, and identify others by initials (presumably they're the ones who cooperated with regulators). But the overall impression is that something happened at S&P, and some individuals were involved, but they were all swept up in some inchoate historical event that requires, nevertheless, that S&P fork over $5 billion. That's what makes reading these legal papers resemble getting through all of "War and Peace" without ever meeting Napoleon.

"We've had the greatest explosion of elite white collar crime in history and the weakest criminal justice response," observes William K. Black, who helped put financial wrongdoers behind bars as a thrift regulator after the savings-and-loan collapse of the 1980s. "There's reason to believe they're not unrelated."

To be fair, the S&P lawsuits — they include the federal case filed in Los Angeles and actions by more than a dozen states, including California — amount to a more aggressive regulatory attack than any mounted thus far. Their target is an indisputably major player in the meltdown.

The $5-billion penalty sought by the U.S. Justice Department would be a pittance compared with the damage done to investors and the general economy by S&P. But as the equivalent of about six years of corporate profits, it would be enough to reduce McGraw-Hill's Manhattan headquarters to a smoking hole in the ground — if you think there's any chance the government can make the claim stick. California Atty. Gen. Kamala Harris seeks redress of at least $1.4 billion in investment losses incurred by the California Public Employees' Retirement System and other state agencies on S&P-rated securities.

The essence of the governments' fraud claim is that S&P held itself out to be an independent and objective appraiser of investment securities, especially the residential mortgage-backed bonds that were hot investment vehicles during the housing bubble. But it wasn't.

To a great extent, the investors who took S&P at its word knew they were acting on faith. The firm, like the other major credit agencies, Moody's and Fitch, were paid for their ratings by the investment banks issuing the securities, a flagrant conflict of interest. S&P charged the bankers up to $750,000 to rate really oddball paper.

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