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Credit Ratings and RICO

July 16, 2011

Credit rating companies play an important role in affirming the credit worthiness of municipalities that issue revenue bonds and other negotiable securities to finance infrastructure projects.

As a consequence, credit rating companies have long standing ties to public executives who rely on good credit ratings to finance long term projects and it has been known that institutions that market municipal bonds kick back a portion of their income to officials who authorize those bonds.

In other words, credit rating agencies, public executives and politicians have a unique relationship that can lead to conflicts of interest and simple bribery.  These relationships are so well established that when credit rating agencies are confronted by politicians who prefer other means than debt financing for public projects—or call for lower taxes—they warn that a lower credit rating will follow.

This most often occurs when Republicans are elected who call for lower taxes.  Since lower taxes on their face mean less revenue, credit rating companies have a legitimate venue for pressuring these elected officials not to lower taxes.  Of course, in doing so they in effect support the opponents of lower taxes—career bureaucrats, public employee unions, the institutions that issue municipal bonds, and, of course, the politicians who drove their state and cities into financial ruin in the first place.

When reading reports that some credit rating agencies will lower the credit worthiness of the U.S. government, intelligent readers should ask themselves, cui bono?  Who benefits?

In the current contest between House Republicans and President Obama,  credit rating agencies that warn that not raising the debt limit will trigger a lower credit rating are in bed with the big spenders who are responsible for this crisis.

All this reminds me of an interesting feature of U.S. criminal law by which the Department of Justice can seek to convict persons engaged in civil transactions for violations of federal criminal law.  The Racketeer Influenced and Corrupt Organizations (RICO) Act allows the U.S. government to charge financial institutions with violation of criminal law if they engage n racketeering activity.

In the current instance of credit rating agencies that are working hand in hand with Democrats to oppose lower taxes and those who oppose raising the debt limit there is a clear case of racketeering.  Why haven’t the Republicans made a RICO claim?

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