By Pam Martens: January 22, 2014

Just when it seemed that the ethical reputation of the U.S. government, now universally known as Bugs R Us by its closest allies, enemies and citizens alike, was at its nadir, along comes a court affidavit by Harold W. McGraw III, chairman of McGraw Hill Financial, parent of Standard and Poor’s rating agency.

The affidavit by McGraw, filed in a Federal District Court in California, seeks to bolster S&P’s position that the government is only suing it in retaliation for its downgrade of U.S. debt rather than meritorious claims that it fudged its credit ratings. The affidavit claims that former U.S. Treasury Secretary Timothy Geithner called McGraw in August 2011 and threatened to retaliate against S&P for downgrading the debt of the United States.

According to McGraw, Geithner was angry and accused S&P of making an error in calculating the basis for the downgrade, stating on the call  “You have done an enormous disservice to yourselves and to your country.” Geithner warned further: “Such behavior would not occur, he said, without a response from the government,” according to the affidavit.

Interestingly enough, although Moody’s rating service was also handing out AAA-ratings to subprime-laden debt bombs in return for huge payments from Wall Street during the lead-up to the credit collapse, the government has only sued S&P among the rating agencies.

In the U.S. Justice Department’s lawsuit against S&P, filed in February of last year, the government alleges that the company “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors…” by falsely representing that its credit ratings were objective, when, in fact, they were motivated by a desire for increased revenue and building market share.

It’s not that those claims lack merit; it’s that many observers on Wall Street believe the claims to be wholly consistent with what Moody’s was also doing. More troubling, Congress has not stopped Wall Street from paying the rating agencies directly for the ratings they dole out.

Through a spokesperson, Geithner has denied that he made any threats of retaliation, making this a “he said/he said” case. That puts Geithner’s reputation on the line versus that of Harold W. McGraw III, the great-grandson of James H. McGraw, the man who founded the company in 1899.

While Geithner, as far as we know, has not closed any bridge lanes or snarled traffic for first responders delivering patients to hospitals, there are some parallels to New Jersey Governor Chris Christie’s new public persona as a bully and a man potentially capable of using his office to inflict retaliation on those who get in his way. According to released emails, Christie’s staff and associates closed multiple traffic lanes to the George Washington Bridge for four days to snarl traffic and retaliate against the mayor of Fort Lee, New Jersey – a man who did not endorse Governor Christie’s run for the governorship.

Geithner is able to offer up the President of the United States as a character witness. On January 10 of last year, when nominating Jack Lew to succeed Geithner as Treasury Secretary, President Obama said “When the history books are written, Tim Geithner is going to go down as one of our finest secretaries of the Treasury.” But the historical record on Geithner has not been enhanced by a string of books from insiders.

Neil Barofsky, former Special Inspector General for the Troubled Asset Relief Program (TARP), ravaged Geithner in his 2012 book Bailout: How Washington Abandoned Main Street While Rescuing Wall Street. According to Barofsky, Geithner used the Home Affordable Modification Program (HAMP) to “foam the runways” for the banks, slowing down the foreclosure stream so that the big Wall Street firms could stay afloat, with no sincere effort to help struggling families stay in their homes. 

Sheila Bair, former head of the Federal Deposit Insurance Corporation, painted an equally unflattering picture of Geithner in her 2012 book, Bull by the Horns.  According to Bair, Geithner showered Citigroup, a firm that was clearly insolvent, with $2.5 trillion in Fed loans, taxpayer capital, and asset guarantees.

In Ron Suskind’s 2011 Confidence Men, Geithner is portrayed as ignoring a directive from President Obama to wind down Citigroup. Instead, Geithner approved the massive bailout package to the company. (Exactly how does a cabinet member ignore a direct order from the President of the United States and get away with it? Does the new normal in Washington allow the Treasury Secretary to take his orders from Wall Street?)

McGraw has a formidable background which would seem to be inconsistent with making up lies about phone calls with U.S. Treasury Secretaries. (Not to mention the fact that, given recent NSA revelations, McGraw would have good grounds to believe that the government could produce a tape of the phone call in question.)

McGraw is Chairman of the Emergency Committee for American Trade, Chairman of the International Chamber of Commerce, and former Chairman of the Business Roundtable. In 2009, he was appointed by President Obama to the U.S.-India CEO Forum and is Chairman of the U.S. Trade Representative’s Advisory Committee for Trade Policy and Negotiations. McGraw serves on the boards of the Asia Society, Carnegie Hall, Committee Encouraging Corporate Philanthropy, and the New York Public Library. He received an MBA from the Wharton School of the University of Pennsylvania in 1976.

Legal researchers for the Justice Department may not have properly anticipated how the McGraw family might respond to being singled out as the lone, rogue defrauder among the major credit rating agencies.

One particular area the Justice Department might have wanted to consider was the war room response that McGraw’s dad launched in 1979 when American Express launched a hostile takeover of the company. McGraw’s father, Harold W. McGraw Jr., who died at age 92 in 2010, launched a public assault against American Express, saying it lacked “the integrity, morality and sensitivity” to merge with McGraw-Hill, and calling the offer “illegal, unsolicited and improper.” After spending millions in a bitter, public battle, American Express eventually backed off.

There’s an old maxim in law: “If you have the law on your side, argue the law; if you have the facts, argue the facts; if you have neither, pound the table.” Geithner may have a tough time pounding anything in this particular case.

Key dates in the history of McGraw Hill and the McGraw family:

• 1888 – Founder James H. McGraw buys the American Journal of Railway Appliances. At the same time, John A. Hill was working as an editor at Locomotive Engineer.
• 1899 – McGraw establishes The McGraw Publishing Company. John Hill later creates The Hill Publishing Company.
• 1917 – McGraw and Hill’s companies merge to form the McGraw-Hill Publishing Company, Inc., with James H. McGraw as president.
• 1957 – The S&P 500 is introduced.
• 1966 – Standard & Poor’s is acquired.
• 1979  – McGraw-Hill successfully rejects a hostile takeover attempt by American Express.
• 1998 – Harold McGraw III, President and Chief Operating Officer, is named CEO.
• 1999 – Harold McGraw III is elected Chairman of the Board.
• 2011 – McGraw-Hill announces its Growth and Value Plan, which includes the creation of two companies: McGraw Hill Financial and McGraw-Hill Education.
• 2012 – The Company launches S&P Dow Jones Indices, the world’s largest provider of financial market indices, in a joint venture with CME Group. The Company announces the sale of McGraw-Hill Education to Apollo Global.
• 2013 – Shareholders approve the Company’s new name: McGraw Hill Financial. Doug Peterson becomes President and CEO on November 1, and Harold McGraw III remains serving as Chairman of the Board.