S&P Chairman Claims Timothy Geithner Warned Firm Following US Credit Downgrade

The Standard & Poor’s (S&P) chairman Harvey McGraw III claims former Secretary of the Treasury, Timothy Geithner warned the financial firm would be held accountable for its 2011 downgrading of the US debt.

In an affidavit McGraw alleges an angry Timothy Geithner called the S&P Rating’s Services parent company three days after the downgrade saying the firm had made an error in its calculations and said its conduct would be “looked at very carefully.”

The S&P chairman states that Geithner didn’t make specific threats, however, the former Treasury Secretary made it clear the government wouldn’t let their action pass without a response.

The account of the phone call is part of a $5 billion fraud lawsuit brought against the S&P last year by the Justice Department.

The government alleges the S&P defrauded investors by ignoring its own standards when they assigned risky mortgage bonds its highest rating prior to the 2008 financial crisis.

The S&P denies the accusations and claims the lawsuit is part of the US government retaliation for downgrading the US debt from AAA to AA+, the first time ever such occurrence took place.

S&P decided to downgrade following concerns about lawmakers’ inability to decide on whether or not to raise the government’s borrowing limit in a timely fashion.

“The allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S&P is false,” a spokeswoman for Mr. Geithner said.

A spokeswoman for the Justice Department adds there was “absolutely no connection” between the downgrade and the Justice lawsuit.

McGraw alleges that Geithner said “you have done an enormous disservice to yourselves and to your country” and that the downgrade had caused real damage to the struggling economy.

“Such behavior could not occur, (Geithner) said, without a response from the government,” McGraw said, according to the deposition.

S&P’s announcement that it was lowering the US’s AAA debt rating to a AA+ came on August 5, 2011 — just days after the government narrowly prevented a debt-ceiling crisis — following a heated meeting between the Treasury Department and the S&P.

Treasury officials discovered what they believed was a $2 trillion error in the baseline assumptions that S&P had used to model the growth of US debt, the Wall Street Journal reports.

Despite the Treasury Department’s pressure, S&P didn’t budge and proceeded with the downgrade prompting the angry call from Geithner.

“I think S&P has shown really terrible judgment, and they’ve handled themselves very poorly,” Geithner told CNBC two days after S&P’s decision.

S&P has denied the downgrade was part of any error as the government claimed and considers the lawsuit “meritless.”

It is not clear what impact the affidavit will have on the case as a whole, as it reflect only the S&P chairman’s personal recollections of his interactions with Secretary Geithner, said Jeffrey Manns, an associate professor of law at George Washington University.