The Tech Herald

Merrill Lynch gave contractor advance notice on S&P downgrade

by Steve Ragan - Aug 19 2011, 02:12

A Merrill Lynch wealth management advisor issued a warning in April about a possible economic threat to the U.S. Federal Reserve, due to Standard and Poor’s likely decision to lower the U.S.’s credit rating. Three months later, S&P did just that. Details on the advance warning came from an email leaked by AntiSec on Thursday.

Earlier this week, The Tech Herald broke the news that Richard Garcia, the Senior Vice President of Vanguard Defense Industries (VDI), was the target of a massive email leak. It is from this cache of communications that the warning surfaced.

VDI is the Texas-based firm responsible for ShadowHawk, an unmanned helicopter that can be tasked with aerial surveillance or equipped for military usage. AntiSec targeted VDI’s website due to their relationship with several law enforcement agencies, as well as their relationship with the FBI, the DHS, and U.S. Marshals Service. In addition, AntiSec supporters have it in for the FBI, and Richard Garcia himself is the former Assistant Director in Charge of the FBI’s field office in Los Angeles.

“Any private corporation supporting US military or law enforcement operations are legitimate targets in our eyes. InfraGard and the FBI are especially our enemies,” explained the AntiSec supporter who spoke with The Tech Herald earlier this week.

The Merrill Lynch email was leaked ahead of the others on Twitter this evening.

In the email, Garcia is relaying information received from a wealth management advisor about a possible economic threat to the Federal Reserve.

“She advised that Standard and Poor’s, […] may lower the credit rating of the US Government which could cause a run on US Banks that will affect the Federal Reserve. They give the US Govt. 2 years to correct the current situation, which they believe both the Republican and Democratic solutions do not do enough and both parties may make this a political situation for the 2012 Presidential election and never come up with a answer to correct the situation within the two years set by Standard and Poor’s. She did not see any real Cyber issue that could change the situation,” he wrote.

The odd thing about the communication is that it happened April 25, long before S&P downgraded the U.S. credit rating. Yet, the logic for the downgrade mentioned in the email was spot on.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement on August 5, the day of the downgrade.

On August 2, U.S. lawmakers agreed to raise the $14.3 trillion USD debt ceiling, and enforce $2.4 trillion USD in spending reductions. That was $4 trillion USD less than what S&P wanted, so they downgraded the U.S. from AAA to AA+.

Last Friday, the Financial Times reported that the U.S. Securities and Exchange Commission was investigating whether there was any sort of insider trading done by S&P employees before the downgrade was official. The story hinged on comments made to the paper by sources close to the investigation itself.

On the day S&P cut the U.S.’s credit rating, Wall Street was flooded with downgrade rumors. These rumors started earlier in the day while trading was active. It turned out they were true.

Mark Gongloff, a financial reporter for the Wall Street Journal commented, “It sure sounded like a leak, though the leak could have come from either S&P or Treasury. It seemed inevitable there would be an investigation, though it could be hard to find anything.”

In the aftermath of the downgrade, many market watchers commented that the move reflected more on the U.S.’s broken political system than it did the U.S.’s markets. In truth, the impact of the downgrade reaches deep. Across the nation, municipalities carrying debt tied to federal creditworthiness each took a hit. This translates in to cut funding for new roads, schools, housing, and more.

We have reached out to the Merrill Lynch wealth management advisor for comment. It’s not odd for someone in that position to know the market and make accurate calls well in advance. We just wonder why no one else did. If they were aware, then why would the news of the downgrade cause such a shock?

As for the fear of a run on the banks, that never happened, but given who owns Merrill Lynch (Bank of America), it’s understandable why they would have a concern or two.

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