“This is what happens, Larry.”

They call Los Angeles the “City of Angels”, I don’t think Standard & Poor’s is finding it to be that exactly. As you all probably know by now, the Department of Justice filed a lawsuit today in LA against S&P alleging they "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."

Although the DoJ probe began in November 2009, Standard & Poor’s should really have seen this coming when they decided to downgrade the US in 2011. The government has denied it, but this is 100% a clumsy attempt at retribution for the downgrade. And it bears some striking parallels to a similar case in Los Angeles that took place back in the early 90s, just about the time of our conflict with Saddam and the Iraqis.

”Is this your homework, Larry?”

Bloomberg reports that S&P gave the investigators more than 20 million pages of documents, telling us what we already know:

1. S&P was paid by the investment banks to rate said CDOs.
2. There were internal disagreements as to how exactly model and rate these securities.
3. The collapse of the mortgage market took most by surprise.
4. The ratings firms got it wrong.

”Look Larry, have you ever heard of Vietnam? You’re entering a world of pain, son.”

The WSJ reports that there had been discussions around a possible settlement, but that the DoJ wanted more than $1 billion to make the lawsuit go away. I’m sure that in these discussions, the particulars/threats of the inevitable lawsuit were explained to S&P by the government.

”You’re killing your father, Larry.”

In his announcement, Eric Holder said this the investigation and the lawsuit are “the latest steps forward in our ongoing efforts to protect the American people from financial fraud, to hold accountable those who violate our laws and abuse the public trust, and to seek justice for all whose lives were devastated by the recent economic crisis.”

It is even possible to demonize ratings firms more than they already have been? I doubt a poll has been taken, but they can’t be much more popular than Congress.

”You might want to watch out that front window, Larry.”

S&P stonewalls the government, and in return the government goes and grabs a crowbar. They think they can milk S&P for up to $5 billion for this.

”Here you go, Larry. You see what happens?”

Eric Holder and the DoJ are making themselves look like fools with this lawsuit. It was over five years ago that the housing market started to unravel, and they’re just now getting around to suing a company that was at the heart of the crisis? This leads me to question the lawsuit’s relevance, especially if they don’t also go after Moody’s, Fitch, and anybody else who was involved in the rating of these CDOs. They were just as involved, and just as wrong.

Little Larry may have taken The Dude’s car for a joyride, but he did not have the money and did not buy the corvette out front. Standard & Poor’s may have screwed up when it came to rating mortgage CDOs, but they most certainly did not singlehandedly crash the economy. It wasn’t malicious. It wasn’t fraudulent. It was just a whole lot of stupidity, on all sides. So really if the government wants to make a statement showing that they mean business, they’d sue everybody.

But, whether or not Eric Holder and Co. actually win the lawsuit, they are still going to In-N-Out afterward. Those are good burgers.