The federal government's lawsuit against ratings agency Standard and Poor’s has been hit by a potential bombshell. In January, the Wall Street Journal reported that Harold McGraw III, Chairman and CEO of S&P’s parent company, testified that after the agency downgraded the nation’s triple-A credit rating, he received a telephone call from then-Treasury Secretary Tim Geithner saying the ratings agency would be "looked at very carefully.“ On Monday, the Wall Street Journal learned that the call between Geithner and McGraw occurred only five minutes after Geithner met with President Obama in the Oval Office.

S&P, which garnered the information by examining Geithner’s public schedule, included it as part of a filing in federal court in the Central District of California. They contended that the timing of the Obama-Geithner conference could support the idea that they were singled out for retaliation, rather than the government’s claim they are guilty of fraud. Unsurprisingly, the Justice Department is accusing the agency of a "fishing expedition” and is urging U.S. District Judge David Carter to deny them access to the records.

In the January affidavit, McGraw submitted a sworn statement to the court, describing an unsettling chain of events that began with S&P’s U.S. debt downgrade, issued on August 5, 2011. He contends that on August 8, he was informed by an official from the Federal Reserve Bank of New York that Geithner "was very angry at S&P.“ Geithner who had previously run the New York branch of the Federal Reserve, allegedly called McGraw. When McGraw returned the call, Geithner allegedly "expressed anger at the downgrade.” An argument ensued, with former Treasury Secretary contending that S&P had made an error in their assessment. McGraw countered that the agency had relied on official statistics provided by the Congressional Budget Office. According to the affidavit, Geithner continued to insist that S&P had made an error. “You are accountable for that,” he allegedly warned McGraw.

McGraw’s sworn statement continued:

As I reported contemporaneously to my colleagues, [Mr. Geithner] said that “you have done an enormous disservice to yourselves and to your country,” that the U.S. economy was bad and that the downgrade had done real damage. S&P’s conduct would be “looked at very carefully” he said. Such behavior could not occur, he said, without a response from the government.

On Feb. 4, 2013 the Justice Department, led by U.S. Attorney General Eric Holder, filed a lawsuit seeking up to $5 billion in civil penalties from S&P. They claimed that from September 2004 through October 2007, S&P “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in” CDOs and securities backed by residential mortgages. Moreover, the agency "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P’s analytical judgment, and represented S&P’s true current opinion regarding the credit risks.“

The DOJ further alleged that the "desire for increased revenue and market share” led the ratings agency to “downplay and disregard the true extent of the credit risks.”

S&P countered that the same CDOs in question were given the same high ratings by a rival agency, and that they were being singled out for the failure to foresee the extent of the housing bust "despite [the] failure of virtually everyone to do so.“

The feds are not suing other ratings agencies, such as Moody’s, whose ratings were identical to S&P’s on nearly every security contained in the lawsuit. No doubt it is sheer coincidence that one of Moody’s owners is Berkshire Hathaway, a firm run by outspoken Obama supporter Warren Buffet. Moreover, released transcripts of Federal Reserve meetings occurring in 2006, during Bernanke’s first year as chairman, show that Fed officials believed the nation could navigate a "soft landing” from cratering home prices – with none other than Geithner himself expressing confidence that “collateral damage” to the economy could be avoided. "We just don’t see troubling signs yet of collateral damage and we are not expecting much,“ Geithner said at the September 2006 Federal Open Market Committee (FOMC) meeting.

In an even greater irony, the government charged S&P under the auspices of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of the bill’s architects was Sen. Barney Frank (D-MA). In a 2005 speech on the House floor, Frank contended, "homes that are occupied may see an ebb and flow in the price at a certain percentage level, but you’re not going to see the collapse that you see when you talk about a bubble. As so those of us on our committee in particular will push for home ownership.” Frank remains completely unscathed by his prognostication, even as S&P remains a target of his law.

McGraw’s testimony essentially alleges that the lawsuit is a smokescreen hiding the government’s real agenda, which is nothing less than retaliation for the downgrade. It is quite possible that the Obama administration, undoubtedly infuriated by concessions it was forced to make in exchange for raising the debt ceiling, was embarrassed by the S&P downgrade, especially when the agency explained that it "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.“

After S&P made its filing last month, the Justice Department countered with a filing of its own on Feb. 17. The DOJ contended that their investigation of S&P began in 2009, long before the downgrade occurred, and that the agency didn’t provide sufficient evidence that the lawsuit was retaliatory. Therefore, S&P wasn’t entitled to information regarding the DOJ’s decision to sue, or other communication that occurred in other government offices. The DOJ is also refusing to turn over any material related to the large banks they claim were the victims of S&P's alleged misdeeds. The ratings agency wants the documents of any government analyses or studies regarding the independence and objectivity of all rating services to see if these banks really believed they were being defrauded solely by S&P, even as competitors Moody’s and Fitch ostensibly remain above reproach.

When S&P filed its latest affidavit, Geithner spokeswoman Jenni LeCompte stated in an email that "the allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S&P is false.” The DOJ countered McGraw’s allegations as well. "This is the first time this allegation is being made 2½ years after the call purportedly happened,“ a DOJ official said, even as he added that lawyers involved in the litigation against S&P were unaware of Geithner’s alleged comments.

There were a lot of villains associated with the housing bust, including the Department of Justice itself. In fact, long after the bubble had already burst, the DOJ was still forcing banks they now portray as victims to issue mortgages to minorities with shaky credit or face charges of discrimination.

Guilty or innocent, S&P deserves every opportunity to defend itself. That the DOJ is determined to prevent the ratings agency from seeing material relevant to that defense speaks volumes. Judge Carter could do the entire nation a favor by ruling for S&P in this latest filing. The ratings agency is far from alone in the desire to see the inner workings of an administration with a decided penchant for withholding critical information and intimidating its adversaries.

Originally published at FrontPage Magazine.