Things are looking up for S&P in its defense against the US$5bn lawsuit filed by the US Federal Government.   A California judge on Tuesday granted S&P permission to access federal documents from the days after S&P stripped the US of its AAA rating.  Documents related to a phone call that Mr. Geithner, then Secretary of the Treasury, placed to Terry McGraw, then chief executive of S&P’s parent company, on the morning after the downgrade.   According to Terry McGraw the Treasury secretary said the S&P conduct would be “looked at very carefully”.

It happens now and then that when public or private entities are downgraded the respective parties call credit rating agencies complaining about the downgrading of their financial instruments and seeking a reversal.  It is probably the first time in recent history that a government is threatening an independent institution about a negative rating decision.

Following S&P’s downgrade the Federal Government filed a US$5bn suit in a Californian court accusing the credit rating agency of inflating ratings to win more fees from the issuers and bankers that pay for them.   It also accused S&P of failing to downgrade ratings for collateralized debt obligations despite knowing they were backed by deteriorating residential mortgage-backed securities.  According to the complaint, S&P rated more than $2.8 trillion of RMBS and nearly $1.2 trillion of CDOs from September 2004 to October 2007.  S&P was the only major credit rating agency sued by the US government.

Source:  Financial Times