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Standard and Poor’s bet on the debt


Before we shoot the messenger, let’s figure out why he’s there. Then we can shoot him.

With S&P being the only one of three agencies to downgrade the United States’ credit rating from AAA to AA+, at least one firm, Moody’s, reaffirmed the AAA rating, Monday, saying, “The US retains its Aaa because of the diversity and size of the US economy, a long record of solid economic growth, and the global role of the dollar and the unmatched access to financing it provides.”

It seems logical, then, to ask, what does Standard and Poor’s see that no one else does? Everyone acknowledges that, in the agency’s own words:

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed… the differences between political parties have proven to be extraordinarily difficult to bridge… Republicans and Democrats have only been able to agree to relatively modest savings.”

Even President Obama agrees. “We didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive,” he said, Monday, in his remarks to the country about the economic downgrade.

What the folks in Washington can’t agree on, the S&P report continues, is what to do about tax revenues and entitlement programs.

“It appears that for now,” they write, “new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”

While that long range outlook is of concern to all ratings agencies, Moody’s and Fitch, the third major government credit ratings agency, are being less aggressive than S&P. Moody’s said, after the debt deal was signed into law last Tuesday, that it has lowered the debt outlook of the United States to “negative,” meaning that it could lower the rating, if things don’t improve, to wit:

“(1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government’s funding costs over and above what is currently expected.”

 Still, President Obama sees S&P’s actions as unwarranted, and dismissed them, Monday, saying that the markets still see the US as a AAA country, and, he declared, “No matter what some agency may say, we’ve always been and always will be a triple-A country.”

Obama quoted his friend and sometimes economic adviser, billionaire investor Warren Buffett, who told Fox Business News, Friday, “If there were a quadruple-A rating, I’d give the United States that.”

Buffett said that he thought the S&P downgrade of the US credit rating “didn’t make sense.” On Monday, S&P took Buffett’s company, Berkshire Hathaway, from a “stable” outlook to a “negative” one, and as tempting as it would be to think it was retaliatory, they took a lot of debt insurers down a notch, including Freddie Mac and Fannie Mae.

So back to why S&P stands alone in what has become such a debilitating action. One thought is, they didn’t think Congress and the White House took the threat of downgrade seriously, and they did it to nudge both sides to work closer together to solve our economic problems.

Another possibility is they want to challenge, by their alleged overreach, a provision of the Dodd-Frank Wall Street Reform Act, which allows for suing a credit ratings agency if they “knowingly or recklessly failed to conduct a reasonable investigation of the rated security with respect to the factual elements relied upon … for evaluating credit risk.”

This provision, presumably, is an admonition to credit ratings agencies in general, and S&P in particular, who recklessly continued to give AAA ratings to derivative traders, despite the contrary evidence that the commodity had no real value and was bound to unravel the global economy.

Perhaps what S&P is doing now is saying, “You want us to be more circumspect in our ratings? Fine. We’re going to be ahead of the curve on this. That way you can’t sue us.”

Indeed, when the law was enacted, last year, S&P issued a letter to its stakeholders, in an effort to comfort them from Dodd-Frank’s perceived threats. “This could potentially lead to more suits as the change may permit claims of federal securities fraud to be brought against a credit rating agency,” the letter explains, adding, “This pleading standard will undoubtedly be tested at some time in the future, and we will be ready to meet this new challenge.”

Perhaps, now is that time.

-PBG

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