Attention Media: S&P Lacks Credibility


When reporting on Standard & Poor's recent downgrade of the U.S. credit rating and its assessments of the U.S. fiscal situation, media outlets should carefully examine the rating agency's credibility.

Congressional Commission: Rating Agencies "Key Enablers Of The Financial Meltdown." From the January 2011 Financial Crisis Inquiry Report:

We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies [Standard & Poor's, Moody's, and Fitch Ratings] were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms. [The Financial Crisis Inquiry Report, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011, emphasis in original]

Initial S&P Downgrade Document Included "$2 Trillion Mistake." From an August 5 New York Times report:

S.& P. had prepared investors for the downgrade announcement with a series of warnings earlier this year that it would act if Congress did not agree to increase the government's borrowing limit and adopt a long-term plan for reducing its debts by at least $4 trillion over the next decade.

Earlier this week, President Obama signed into law a Congressional compromise that raised the debt ceiling but reduced the debt by at least $2.1 trillion.

On Friday, the company notified the Treasury that it planned to issue a downgrade after the markets closed, and sent the department a copy of the announcement, which is a standard procedure.

A Treasury staff member noticed the $2 trillion mistake within the hour, according to a department official. The Treasury called the company and explained the problem. About an hour later, the company conceded the problem but did not indicate how it planned to proceed, the official said. Hours later, S.& P. issued a revised release with new numbers but the same conclusion.

In a statement early Saturday morning, Standard & Poor's said the difference could be attributed to a "change in assumptions" in its methodology but that it had "no impact on the rating decision." [The New York Times, 8/5/11]

Krugman: "It's Hard To Think Of Anyone Less Qualified To Pass Judgment On America Than The Rating Agencies." From an August 5 post by economist Paul Krugman:

[I]t's hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point -- then went ahead with the downgrade.

More than that, everything I've heard about S&P's demands suggests that it's talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.

So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future -- but there's no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.

In short, S&P is just making stuff up -- and after the mortgage debacle, they really don't have that right.

So this is an outrage -- not because America is A-OK, but because these people are in no position to pass judgment. [The New York Times, 8/5/11]

Rating Agencies Criticized For Handling Of Enron, WorldCom Ratings. A February 6, 2005, New York Times article reported:

When Enron and WorldCom failed, investors were stunned by how long it had taken the agencies to recognize the companies' declining fortunes. For example, all three agencies had rated Enron an investment-grade company until four days before it filed for bankruptcy. They had rated WorldCom similarly until a few months before it collapsed. [The New York Times, 2/6/05]

In 2002, the Times reported:

Credit-rating agencies, the independent securities analysts that pass judgment on a company's financial fitness, saw signs of Enron's deteriorating finances by last May. But the agencies -- Moody's Investors Service, Standard & Poor's and Fitch Ratings -- did little to warn investors until at least five months later, long after more problems had emerged and Enron's slide into bankruptcy had accelerated. [The New York Times, 2/8/02]

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