Two stories that caught my eye this morning give us further cause to distrust our government. The Justice Department is now finally investigating Standard & Poor′s for their methodology of rating those fun-loving mortgage-backed securities. The second story is how the Securities and Exchange Commission has an on-going policy from the early 1990s of shredding files on preliminary investigations of potential wrong-doing. For the first story, the timing is suspicious. Could this Justice Department investigation of S&P be retaliation for downgrading the U.S. credit rating? One would think that the SEC had already looked into this since its been common knowledge that S&P and the other credit rating agencies really blew it in their evaluation of mortgage-backed securities, such as those wonderful credit default swaps and bundled traunches of subprime home mortgages. If so, did they destroy their files on their initial investigation?
On story No. 2, we can thank Sen. Charles Grassly (R-IA) as head of the Senate Judiciary Committee is spearheading a request for full details from the SEC after information provided by whistle-blower Darcy Flynn. Flynn alleges that the SEC destroyed over 9,000 documents, including material on the Goldman Sachs – AIG trades, potential insider-trading of Deutsche Bank, Lehman Brothers and SAC Capital, as well as other possible financial frauds at Wells Fargo and Bank of America, plus the whole Bernie Madoff thing.
Since the early 1990s, the SEC routinely destroys all MUI, Matters Under Investigation, documents once the senior management decides not to pursue any legal actions. For example in the case of Bernie Madoff, where the SEC had done several investigations prior to his arrest, none of the information gathered from earlier probes would have been available to investigators due to this policy. There is a question of whether the SEC violated federal laws as such documents should have been secured by the National Archives and held for at least 25 years.
Which, of course, brings us to story No. 1, why the Justice Department only now has decided to examine the methods used by Standard & Poor′s to rate mortgage-backed securities. One of the common themes coming from the White House and Democrat Party in their criticism of the S&P downgrade of U.S. Triple-A credit rating is that S&P blew it when rating those mortgage securities. A valid point. However, the usual chain of procedure would have been for the SEC to do the investigation, then, if the senior management determined based on the results of the MUI that legal action was necessary, turn the case over to the Justice Department.
So why is this important? Simple, what we have here is once again, a clear case of how our government is too large, too bureaucratically flawed, to provide adequate oversight and carry out their objectives. What is worse is that the new Dodd-Frank Act of 2010 provides for even more agencies to run amok without Congressional oversight. The Justice Department investigation into Standard & Poor′s, while it may be valid, looks suspiciously like a retaliatory witch hunt for political purposes due to its timing. The question is begged if the Securities and Exchange Commission has already looked into this matter over the past three years? If so, were the files from the SEC destroyed following the same policy that some other 9,000 files were shredded? I have often said that the true scope and depth of our financial woes may be unknown, certainly by the public. Are we seeing now just how the truth is being manipulated and covered up?
