This morning, reports the Wall Street Journal, credit ratings agency Standard & Poor's sharply downgraded its rating for bond insurer Ambac Financial, anticipating that the company's debt obligations would continue to absorb losses.

Why should we care?

Because this seemingly mundane piece of financial news offers a window into one of the crucial -- and often under-covered -- causes of the financial crisis currently shaking Washington and the country: the role of the credit ratings agencies. And inside that wider crisis, as we'll be making clear in the coming weeks, there's perhaps as much muck, both personal and institutional, as anything the Bush administration has given us over the last eight years.

First, a very quick and dirty rundown of the issue:

The banks and insurers felled by the collapse of the housing market relied on the three major credit ratings agencies -- S&P, Moody's, and Fitch -- to rate the mortgage-backed securities that they offered to investors. But here's the problem: the ratings agencies are paid for their work by the very banks and insurers for whom they're producing ratings. If the banks don't like the rating they receive from one ratings agency, they can simply go to another agency that's willing to produce a more favorable score -- what's known as "ratings shopping."

As a result, the agencies have an obvious incentive to knowingly inflate their ratings -- and sometimes even to rate junk securities that shouldn't even get a rating at all. And since many of these securities turned out to be all but worthless pools of home-loan mortgages, that's exactly what the ratings agencies often did.

Internal agency documents released last month as part of an investigation by Rep. Henry Waxman's House Oversight and Government Reform Committee show that at least some ratings analysts were aware that their ratings were more about increasing their company's bottom line than accurately gauging the value of the securities at issue.

Here's one IM exchange from April 2007, between two S&P analysts, reported last month by the Wall Street Journal --:

Rahul Dilip Shah: btw -- that deal is ridiculous.
Shannon Mooney: I know right ... model def does not capture half of the risk
Shah: we should not be rating it.
Mooney: it could be structured by cows and we would rate it.

And in a 2007 presentation to directors, Moody's CEO Raymond McDaniel wrote:

Analysts and MDs [managing directors] are continually 'pitched' by bankers, issuers, investors -- all with reasonable arguments -- whose views can color credit judgment, sometimes improving it, other times degrading it (we 'drink the kool-aid'). Coupled with strong internal emphasis on market share & margin focus, this does constitute a 'risk' to ratings quality.

At a hearing he held on the issue, Waxman himself quoted another S&P analyst asserting:

Rating agencies continue to create an ever-bigger monster, the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters.

The ratings agencies are now being forced by events to at last downgrade some of these securities -- hence today's news about S&P's belated move to downgrade Ambac, which sent the company's stock plummeting.

Indeed, this same dynamic preceded the collapse of insurance giant AIG in September. Until the 15th of that month, S&P had rated its unsecured debt at AA minus, far above what it merited given the value of the underlying mortgages -- leading investors to see AIG as a secure bet. When, on that day, S&P suddenly and severely cut their rating to bring it into line with reality, the company was required to post $14 billion to comply with the terms of the credit default swap agreements they had entered into. That was $14 billion AIG didn't have, and all of a sudden, U.S. taxpayers were on the hook.

It doesn't have to be this way. Sean Egan is a founder of Egan-Jones, an independent ratings agency that's paid not by insurers, but by investors. In testimony before Waxman's committee, and again in an interview with TPMmuckraker, Egan emphasized that -- despite the apparent personal corruption of individual analysts and senior management at the agencies -- the only way to fix the problem is for the federal government to take steps to re-align the system of incentives that prevails on the agencies. If they're rewarded for giving investors an accurate picture of the value of securities, they'll be likely to do so. If not, they'll keep pumping up their ratings to please the banks. And soon enough, a new house of cards will rise and fall.

Lurita Doan, the former administrator of the General Services Administration (GSA), is a favorite of TPMmuckraker -- not just because she's sufficiently steeped in controversy, but because she makes for some great TPMtv.

Well today, Lurita decided to make us some great PDFs.

The House Oversight Report released yesterday found that the White House had enlisted government agencies -- like the GSA, led by Doan at the time -- to assist Republicans running for re-election. You might remember Doan as the agency head who had the good sense to ask Karl Rove's aide Scott Jennings, "how 'we' could help 'our candidates' in the next election" in front of a roomful of assembled officials.

Doan wrote a angry two-page response to Committee Chairman Henry Waxman, defending herself. For the world's viewing pleasure, she sent a copy of that letter to FedBlog, who wasted no time in posting it.

"Most Americans have grown familiar with your lack of candor, misleading statements, and bitter partisan machinations, and certainly, your report serves as yet another example of the same ol' same ol' from Henry Waxman," Doan begins her letter.

"You, quite shamefully, decided to ignore it," Doan continues, after laying out her version of events. "You didn't want the truth; you wanted a highly charged misinterpretation so that you could weave your idea of political gold."

Doan also criticizes the investigation of Office of Special Counsel Director Scott Bloch, who she claims "directed federal employees, on government time to pen anonymous blogs to further disparage my character and distort the facts for your direct benefit."

"Are you aware," she continues, "one of Mr. Bloch's federal bloggers penned especially negative attacks and disguised himself 'a combat veteran'. [sic] How utterly craven."

But really, our favorite part is the finale where she begs for a chance to go in front of the Committee again.

I now understand you and your ubiquitous hypocrisy. I know how your witch hunts and kangaroo courts work. So please, invite me to testify. I can't wait.

We can only hope, Lurita.

Read Doan's letter to Waxman, in all its glory, here.

Oversight Chairman Henry Waxman (D-CA) and Rep. Tom Davis (R-VA) came together today to criticize the White House for their use of executive privilege in the Valerie Plame leak scandal.

The two lawmakers called Bush's refusal to disclose the report of the FBI interview with Vice President Cheney "legally unprecedented" and "inappropriate." The committee seeks the document in order to establish the White House's role in the leak of Plame's name to the media.

From The Hill:

"The president's assertion of executive privilege over this document was legally unprecedented and an inappropriate use of executive privilege" Waxman, the panel's chair, and Davis, the ranking Republican, said in a joint report.

Although both lawmakers agree that the president's action was "inappropriate," they disagree over whether Bush had the right to invoke executive privilege. Waxman rejects the validity of the assertion while Davis supports the privilege.

Waxman has been attempting to get access to the document since December 2007, and the committee issued a subpoena for it on June 24th 2008.

The Justice Department declared it would "not provide or make available any reports of interviews with the president or the vice president from the leak investigation" in response to the subpoena.

In response to concerted requests from Republicans, Rep. Henry Waxman (D-CA), who chairs the House Oversight Committee, announced today that the committee will hold hearings into the failure of mortgage giants Fannie Mae and Freddie Mac.

Waxman's low-key announcement -- "the request we've received from the minority will be pursued," he said -- came at a hearing with executives of AIG, as part of a committee investigation into the failed insurer. Yesterday, GOP members of the committee launched a campaign to discredit Waxman's broader investigation into corporate misdeeds, including at AIG.

Republicans had also called on Waxman to look into Fannie and Freddie, who, unlike many other corporations implicated in the current financial crisis, have closer ties to Democrats than to the GOP, by some assessments.

At a hearing yesterday, Rep. Tom Davis of Virginia, the ranking Republican on the committee, said of Fannie and Freddie: "They seem to be at the epicenter of the crisis, and yet the chairman continues to focus on issues, such as executive compensation, that generate headlines but neither get to the root of the problem nor move us any closer to a solution. We'd hate to think the millions of dollars Fannie and Freddie executives contributed to Democratic congressional candidates also contributed to the reluctance to investigate this aspect of the crisis."

Republicans also called, at this morning's hearing, for Attorney General Michael Mukasey to appoint a special prosecutor to look into Fannie and Freddie.

Henry Waxman, House Oversight Committee Chairman, added three more hearings on the financial crisis to the Committee's schedule in October.

Oversight had already planned to hold hearings on AIG's bailout and Lehman Brother's bankruptcy.

The new hearings will cover hedge fund regulation, the breakdown of credit rating agencies and the role of federal regulators.

"This financial crisis has shaken the global economy," Waxman said. "Congress cannot wait until a new administration arrives in January to examine what went wrong and who should be held accountable."

Waxman wrote letters requesting testimony from Treasury Secretary John Paulson, philanthropist George Soros, former Fed chairman Alan Greenspan, SEC chairman Christopher Cox and the heads of a number of hedge funds.

It looks like Congress has stepped into the fray of the Wall Street crisis.

In letters to Lehman Brothers and AIG sent today, Rep. Henry Waxman (D-CA), chair of the House Oversight Committee, requested the communications from the last 180 days of the CEOs and board of directors at the two companies. He also requested information about how the CEOS and board members would be compensated following the bankruptcy and government bailout of the two firms.

Additionally, a tipline has been set up to assist Congress with their "investigation into the collapse of Lehman Brothers and AIG."

The Pentagon defied a Congressional subpoena yesterday by refusing to let the head of its sexual assault program testify at an oversight hearing about sexual assault in the military.

The House panel had issued a subpoena for Dr. Kaye Whitley, the director of the Defense Department's Sexual Assault Prevention and Response Office.

But Pentagon officials ordered her not to testify and instead sent her supervisor, Michael Dominguez, a principal deputy undersecretary for defense, in her place.

Whitley's absence came on the same day a federal judge rejected the White House's claim to blanket immunity from Congressional oversight in an unrelated case.

Dominguez told the committee the Pentagon was not citing executive privileged but had simply instructed Whitley not to show up.

A Pentagon spokeswoman, Cynthia O. Smith, provided a statement today in response to questions about Whitley's defiance of the subpoena.

It is inappropriate to question Dr. Whitley about the program when Mr. Dominguez, the decision maker responsible for the program and for the program's results, is available to answer those questions.

Mr. Dominguez has full accountability and responsibility for the Sexual Assault Prevention Office and he has the full authority to discuss and answer all questions regarding the SAPRO and the Department's sexual assault policies. Dr. Whitley is responsible for implementing the policy....

Dr. Whitley has been on the Hill numerous times discussing the DoD's sexual assault program and she will continue to do so.

Lawmakers interpreted the move as an affront to Congressional authority and said they had specifically sought Whitley based on her knowledge of how the military's sexual assault programs actually work in practice.

Rep. Henry Waxman (D-CA) said to Dominguez at the hearing:

"What is, what it is you're trying to hide? She's the one in charge, let me speak, she's the one in charge of dealing with this problem. We wanted to hear from her. And despite a subpoena from a committee of Congress, you've been instructed by the secretary, undersecretary or deputy secretary in charge of legislative affairs not to allow her to come? ... I don't know who you think elected you to defy the Congress of the United States. We're an independent branch of government. ... this is an unacceptable, absolutely unacceptable position for the department to take and, uh, we are not going to let it stand."

Rep. John Tierney (D-MA) tersely dismissed Dominguez without asking him any questions about sexual assault.

"Well let me tell you something Mr. Dominguez, we decide who we want to have for witnesses at this hearing, we decide who, uh, the people that are going to give us factual testimony, the ones that we want to hear from when we are investigating or having a hearing. So for now Mr. Dominguez, you're dismissed."

Here is a clip of the entire nine-minute exchange between Dominguez and the lawmakers.

In June, the House panel asked Whitley to testify. When the Pentagon resisted, the committee issued a subpoena on Monday compelling her to attend the hearing yesterday, according to a statement today from Tierney, the chair of the oversight committee's National Security and Foreign Affairs subcommittee.

The hearing on sexual assault in the military came the same day as a
GAO report that found sexual assault in the military is probably underreported by half.

Some victims in the military do not report sexual assault because they fear "that nothing will be done; fear of ostracism, harassment, or ridicule; and concern that peers would gossip," according to the report.

Whitley's office is essentially a policy office and the bulk of the military sexual assault support programs are run by individual commanders. The Pentagon has resisted efforts to create an Office of the Victims' Advocate, which would oversee those efforts more independently.

An advocate for military victims of sexual assault tells TPMmuckraker that Whitley's office is under-resourced and reflects the Pentagon's lack of attention to sexual assault.

"We are concerned that it does not have all the tools and personnel it needs to go forward. And we're increasingly concerned that it is becoming politicized," said Anita Sanchez, communications director for the Miles Foundation.

Tierney said the committee is considering "ALL our options here in the face of this blatant disregard of a validly-issued subpoena," including seeking a contempt of Congress charge for Whitley, Dominguez or others.

Yesterday we learned that Rep. Henry Waxman (D-CA) wrote a letter to Special Counsel Scott Bloch urging the embattled chief of the independent investigative office to step down.

Bloch's had a lot of problems lately. He's under investigation by the FBI and his top deputy quit recently complaining about "political agendas" at the office that's supposed to investigate things like misconduct related to political agendas.

Today we see that Bloch promptly fired back, sending Waxman, chairman of the House oversight committee, a terse letter saying he has no plans to resign his post until his term ends next year.

Read the letter here.

Special Counsel Scott Bloch is under investigation by the FBI. His own employees can't stand him. And now pressure is mounting from Capitol Hill for one of Washington's top watchdogs to step down.

House oversight committee chairman Henry Waxman (D-CA) sent Bloch a letter yesterday urging him to step down from the agency charged with investigating allegations of retaliation against whistle blowers.

The mission of the agency should be the paramount consideration. It is for this reason that I have concluded that OSC would be better served with new leadership and urge you to step down as the Special Counsel. Such a move would be in the best interest of the agency and the federal employees its charged to protect.

Waxman's letter comes after Bloch's chief deputy resigned from the office citing "political agendas."

Up until now, Waxman has been uncharacteristically quiet regarding allegations of Bloch's misconduct, which includes retaliating against whistleblowers in his own office.

The committee's ranking member, Tom Davis (R-VA), called for Bloch's resignation weeks ago.

Private military contractor Blackwater and its affiliates may have wrongly received more than $100 million in contracts that were supposed to be set aside for small businesses, according to an inspector general's report released today.

At issue was a November 2006 determination by the Small Business Administration that a Blackwater affiliate, Presidential Airways, was a small business with less than 1,500 employees.

Blackwater contended, and the agency agreed, that its more than 1,000 workers providing security for the State Department overseas were not employees, but independent contractors. That made the company appear smaller on paper than it actually is.

The SBA Inspector General said that assessment was incorrect, based on SBA regulations.

How the agency made that determination regarding Blackwater is unclear, the report concluded.

"We're not sure how that happened," Glenn Harris, chief counsel for the SBA inspector general's office, said in an interview with TPMmuckraker. "We're not saying there was misrepresentation. ... It could be contracting-officer error."

Although Blackwater did provide some information indicating the size of the company, the SBA appears to have overlooked evidence that the company was too large to qualify as a small business.

SBA did not follow-up on or attempt to reconcile conflicting information in its files that the total number of Blackwater employees -- even excluding the security personnel hired under Federal contracts -- exceeded the applicable size standard.

The SBA IG forwarded its report to the Department of Defense and the Department of Veterans Affairs, which together awarded Blackwater some 39 contracts that were set aside for small business. SBA only accesses whether a company is eligible for small-business contracts.

Rep. Henry Waxman (D-CA), chairman of the House oversight committee, questioned Blackwater's conduct.

"The SBA IG report raises serious concerns about whet her Blackwater made false statements about its small business status to the federal agencies that awarded these contracts," wrote in a memo to his committee today.

A spokeswoman for Blackwater denied any wrongdoing by the company.

"Over the past several years, expert accounting and outside legal counsel have determined that Blackwater's classification of security personnel as independent contractors is reasonable, correct and legally protected," said Anne Tyrell, the spokeswoman.

She said the IG's report "draws no conclusions" and was "unnecessarily speculative."

The Small Business Administration did not respond to a request for comment.

Late Update: The SBA issued a statement noting that the the IG report questions its reasoning in the size determination but did not declare it incorrect.

The lack of clarity, the report says, depends on various interpretations of whether nearly 1,000 security personnel hired for a Department of State contract were employees and should have been counted against the 1,500-employee limit, or whether they were contractors and should not have been counted.

"As a legal matter, some factors suggested Blackwater's security personnel were employees; other factors suggested they were independent contractors. The company also represented that those staff were considered independent contractors for IRS purposes," the statement said.

We've seen a lot of assertions of executive privilege in the last few months-- from Karl Rove to Stephen Johnson -- but now Attorney General Michael Mukasey has claimed executive privilege on behalf of President Bush.

Mukasey's letter to House Oversight Committee Chairman Henry Waxman (D-CA) last night, pre-empted a vote this morning on contempt of Congress stemming from the White House's refusal to release FBI documents relating to the Valerie Plame leak scandal. The documents were subpoenaed by Committee on June 16.

From the Mukasey's letter to Bush:

I am greatly concerned about the chilling effect that compliance with the Committee's subpoena would have on future White House deliberations and White House cooperation with future Justice Department investigations.

Hmmm. Where have we heard that before?

Rep. Henry Waxman (D-CA) plans to investigate reports that a Homeland Security adviser was soliciting donations to the Bush presidential library fund in exchange for access to high-ranking government officials.

Waxman sent a letter to Stephen Payne's Houston office requesting written responses to a series of questions:

1. What is your affiliation with George W. Bush Presidential Library? Have you been authorized or asked to solicit funds for the library?

2. Have you ever solicited funds for the library from any individuals, governments, companies, or organizations?

3. If you have ever solicited funds for the library, please describe each solicitation, including the persons or organizations solicited and amounts requested and received, and describe whether you arranged or attempted to arrange any meetings for such persons or organizations with U.S. government officials.

Meanwhile, Department of Homeland Security officials are also investigating Payne, who was appointed last year to sit on the department's main advisory board.

"This is a horribly unfortunate story," said Homeland Security spokeswoman Laura Keehner. "We are looking into the facts." She declined to comment further.

Waxman asked that Payne provide his responses to the committee by July 23.

Read more for the full text of the Waxman's letter.

Read more »

House Oversight Committee Chairman Henry Waxman (D-CA) is wielding more than his gavel against Attorney General Michael Mukasey.

In a letter to the AG today, Waxman brought out the big guns, stating that the Committee would vote to hold him in contempt on July 16, if he failed to produce a report on an interview with Vice President Cheney regarding the Valerie Plame leak scandal.

From Waxman's letter:

Despite the Committee's repeated requests, you have consistently refused to provide these reports to the Committee or unredacted versions of the reports of FBI interviews with White House staff. In response to the Committee's June 16 subpoena, you wrote: "we are not prepared to provide or make available any reports of interviews wi t h t he President or Vice President from the leak investigation" because of "core Executive Branch confidentiality interests and fundamental separation of powers principles."

. . .I regret that your failure to produce responsive documents has created this impasse, but Congress has a constitutional duty to conduct oversight of the executive branch. Therefore, unless all responsive documents, with the exception of the FBI interview report of President Bush, are provided to the Committee or a valid assertion of executive privilege is made, the Committee will meet on July 16 to consider a resolution citing you in contempt. I strongly urge you to reconsider your position and comply with the duly issued subpoena.

As we mentioned earlier today, House Oversight's subpoenas for Bush and Cheney's interview records from DOJ Special Counsel Patrick Fitzgerald's inquiry into the Valerie Plame leak case were rebuffed by the Justice Department.

Since then, we've obtained a copy of the letter dated June 24 that the Justice Department sent to Congress, declining to comply with the subpoena.

Their reasons? The ever-ready assertion of executive privilege because the write ups of the FBI interviews with White House officials during the Plame leak investigation contain accounts of of internal White House deliberations, including those involving how to respond to the fallout from the infamous 16 words on Niger yellowcake in the President's 2003 State of the Union address:

However, these reports also contain considerable information detailing the internal White House deliberations and communications of senior White House staff concerning how they should respond on behalf of the President to public assertions challenging the accuracy of a statement made in the President's State of the Union Address.

The DOJ was also concerned that by releasing their interview records with Bush and Cheney, they would create a disincentive for future voluntary interviews from the executive branch. . . despite the fact that it's all been done before. In 1999, the FBI surrendered interview records of former President Bill Clinton and former Vice-President Al Gore:

We are aware that in 1999 the Department made available to this Committee the FBI reports of interviews with President Clinton and Vice President Gore that were taken during the Department's campaign finance investigation. We consider that situation to be fundamentally different from the present situation. We understand that the intrusion on Executive Branch confidentiality interests was significantly less because the Clinton Administration interview reports presumably did not involve the substance of internal White House deliberations and communications concerning official White House business, but rather concerned campaign-fundraising political activities.

The full text of the letter, after the jump.

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The Bush Administration has had since March 12 to respond to the subpoenas from the House oversight committee requesting documents pertaining to the EPA decisions on greenhouse gas and ozone regulations. Yet it waited until this morning -- the day the Committee was scheduled to vote on their contempt for their failure to respond -- to assert executive privilege.

Time and again, that inveterate stonewaller, EPA administrator Stephen Johnson, has gone up against committee Chairman Henry Waxman (D-CA) and bobbed and weaved through his testimony, never quite answering questions but never quite invoking executive privilege either.

During a May 20, 2008, appearance before the committee, Johnson was specifically asked by Waxman whether he was invoking executive privilege. "Not at this time," Johnson replied.

Well that time must have passed.

More on "Stonewall" Johnson's evasive maneuvers after the jump.

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