Is S&P About To Fall Prey To American Bloodlust?

Is it the first move in a new crackdown, or another act of symbolic politics? The Wall Street Journal reports:

The Justice Department and state prosecutors intend to file civil charges alleging wrongdoing by Standard & Poor’s Ratings Services in its rating of mortgage bonds before the financial crisis erupted in 2008, according to people familiar with the matter.

Here’s the key piece:

Many details of the looming enforcement action couldn’t be immediately determined, such as why prosecutors are zeroing in on S&P rather than rivalsMoody’s Corp. and Fitch Ratings, a unit of FimalacSA and Hearst Corp.

As Reuters points out, all the ratings agencies have long been the focus of pent-up financial frustration. In addition to being the first federal action against such an agency, the DOJ’s impending suit comes complete with collaboration by a number of states’ Attorneys General, who are expected to join the legal effort.

Though these are early days, three powerful forces are set to collide in what’s sure to be a high-intensity case:

American bloodlust. Obama has presided over an extremely lenient federal attitude toward those at the top of the crisis-era financial pyramid, who have nonetheless amassed enemies across the political spectrum. S&P is going to be hard up for politically powerful defenders — despite its insistence that the lawsuit against them is “entirely without factual or legal merit.” This is exactly the sort of federal move that gets harried, disgruntled people nodding along grimly. Why S&P and not another target? Some people asked the same question about Iraq, but for most, the details were ancillary to the main point: we were hitting back, and hard.

Rule of lawyers. Niall Ferguson’s latest bite at the apple of our endless woes involves portraying the West as moving away form the rule of law and toward the rule of lawyers. As gratifying as it may be to see to some to the Department of Justice haul Standard and Poor’s into court, the dramatic ordeal will underscore the sensation that nothing important seems to happen in America without a lawyer, or many lawyers, being involved — or being in control. For those of us who exist outside the imperial bubble, run-ins with lawyers are a terrifying, draining prospect. For those inside the bubble, it’s business as usual. And now more than ever, the public and private powers that be look unflatteringly similar flanked, as they always are, by their respective phalanxes of lawyers.

Arbitrary regulation. With a regulatory state as large as ours, which presumes to arrogate to itself the supervision of such a large chunk of social activity, the practice of regulation takes on an increasingly arbitrary cast. Unable to ensure that a small and simple set of laws are obeyed, regulators dive headlong into the scheming, strategic, yet ultimately blundering world of the overworked Machiavellian attorney. Deals are cut with known wrongdoers. Examples are made as circumstances permit. Friends are singled out for favors and rewarded for exemplary compliance. Yesterday’s foes become today’s working partners, and vice versa. Add American bloodlust to the rule of lawyers, and what you get is a reactive, irrational, and deeply arbitrary regulatory regime. If the federal case against S&P goes on too long, or draws too much media attention, this is likely to become a central narrative. And if that happens, you can say goodbye to the case as a relatively quick and easy way for the feds to score at least half-legitimate points against a big player in the financial meltdown.

Ultimately, the too-big-to-fail mentality is just a symptom of a diseased regulatory system that’s too big for any of its players, public or private, to disentangle themselves from its dysfunctions. Anyone hoping for a new era of white-knight prosecutions against culpable corporate bigwigs should curb their enthusiasm now.
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