Update: S&P is now denying that they endorse the Reid plan. They evidently understand the implications of this kind of “selective disclosure” to big investors….

Standard and Poors is evidently meeting with high-stakes gamblers and letting them know where to place their bets as they manipulate the global economy.

But they are also playing a much more sinister game.  Like a cat toying with a mouse, they are also inserting themselves in the political process and setting themselves up to be kingmaker in the 2012 election.

An item in Politico’s Morning Money caught my eye:

BEHIND THE MUSIC – S&P’s John Chambers has met with a number of big investors include Pimco’s Mohammed El-Erian. Apparently he is telling them he prefers Reid’s plan.

CNN’s Erin Burnett also tweets that the “source who met with Standard and Poors says SIZE of Boehner plan is the problem.MIGHT not be enough to avert downgrade,needs to be closer to $3TR all at once.”

If these reports are correct, S&P is meeting privately with big investors and giving them information that they are not giving the public about about what their research says, what position they will take, and what they intend to do with regard to a potential credit downgrade of US debt.

This appears to be “selective disclosure” to big investors on the part of Standard and Poor’s.  And while putting a $4 trillion number on a deficit reduction package might be in violation of the IOSCO code of conduct, “selective disclosure” is in violation of SEC rules.

It’s illegal for you or me to trade on material information not available to the general public.  If investors trade on the basis of material nonpublic information, that’s against the law, too.  SEC regulations state:

[W]hen an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information.

Yet here is S&P’s John Chambers meeting with Pimco, and telling them they favor the Reid plan — information they have not made available to the public.

If you read the consent order issued by the Massachusetts Securities Division in June of this year  (PDF), that’s exactly the activity that got Goldman Sachs in trouble.  Goldman was selectively giving information to “large institutional investors” that it did not make available to the public.

Prior to Dodd-Frank, credit ratings agencies were exempted from selective disclosure regulations.  Dodd-Frank removed that exemption.  S&P is now subject to the same laws that Goldman Sachs is.

But S&P’s activities have the potential to be much, much more sinister than Goldman Sachs’s.

It appears imminent that the credit ratings agencies will downgrade US debt.  It’s completely irrational and unjustifiable, but it’s not a matter of “if” but “when.”  And just as the battle over the debt ceiling between Republicans and Democrats was largely consumed with pinning responsibility for any default on the other (“nobody wants to be Newt”), so now the battle seems to have shifted to who will bear the blame for an inevitable credit downgrade.

The Wall Street Journal says that a credit downgrade could have a serious negative impact on Obama’s 2012 election chances.  Ordinarily I would say that was the WSJ just playing their part on the GOP bench, but nobody knows what the implications of a downgrade would be, and it has the potential to be absolutely devastating.

It’s not a coincidence that Timothy Geither met with Standard & Poor’s  in April to lobby them heavily not to downgrade the US debt.

Nor is it a coincidence that RNC Chairman Rence Priebus was egging S&P on, tweeting that “It is alarming that the WH would encourage S&P to suppress a damaging fiscal report for Obama’s partisan speech.” Or that Darryl Issa is out there saying “we should be downgraded.”   Everything in our current environment gets reduced to a battle for partisan political advantage.

S&P is coming in on the side of the Reid plan now, even though that plan appears to be indistinguishable from the Boehner plan in just about every meaningful way.  But that plan does not meet the $4 trillion number they prescribed when they issued their negative watch, so it doesn’t meet their own standards to prevent a downgrade.  Moreover the Reid plan has zero chance of passing.  But its inevitable failure will be used to justify S&P’s decision to downgrade, and it allows them to shrug and say “we weren’t playing politics, we supported the Democratic plan.”

But no matter what political stagecraft is orchestrated, there is a very serious chance that a ratings downgrade will trigger an economic downturn that would cause unemployment to rise dramatically.  And everyone on all sides knows that Obama would most certainly pay the price for that in 2012.

I don’t care whether you’re rabidly pro- or anti-Obama, a Republican or a Democrat or an Independent or a Green or none of the above.  What S&P and the other CRAs are doing right now is completely illegal and outside the boundaries of their own codes of conduct.  They’re acting as Wall Street’s tasers in Shock Doctrine 2.0, and making themselves the key player in determining what happens not only with the 2012 election but with the world’s economic future.  They are playing a very dangerous game with the world economy that could have devastating consequences for all of us, regardless of what your partisan identification is.

Maybe you’re a Republican and you say “so what, too bad for Obama.”  But what they do to one side today they will most certainly do to the other side tomorrow.  And I would be saying the exact same thing no matter who was in the White House.

Does anyone really want to see an organization have that kind of power over the political process?

No private entity should have the power to bring down a president with an arbitrary and unjustifiable wave of the hand.  No company should be able to line up a nation’s assets and orchestrate a fire sale on behalf of Wall Street, and then give them a private showing about what’s in store. They should not have the right demand cuts that destroy critical social safety net programs that the public overwhelmingly supports like Social Security and Medicare, and they most certainly should not be able to crown a new king as they implement Wall Street’s shock doctrine vision for the future.

Everyone who values democracy should be deeply concerned about what Standard and Poors is doing right now.