Almost imme­di­ate­ly after Stan­dard & Poor’s revealed on Fri­day that it was down­grad­ing the Unit­ed States’ cred­it rat­ing to AA+ from AAA, the deci­sion became fod­der for crit­ics of the Oba­ma administration.

Among the loud­est crit­ics are the bevy of 2012 Repub­li­can pres­i­den­tial can­di­dates, who have tried to blame Amer­i­ca’s eco­nom­ic woes on the Demo­c­ra­t­ic Par­ty despite the fact that the poli­cies of the last Repub­li­can admin­is­tra­tion (under George W. Bush) con­tributed to the col­lapse of the econ­o­my in the first place.

The way they’ve char­ac­ter­ized the down­grade makes us won­der if they even both­ered to read Stan­dard & Poor’s announce­ment, which cit­ed polit­i­cal grid­lock in D.C. as a fac­tor that con­tributed to their deci­sion. It takes two to tan­go, as the say­ing goes. Since the midterms, we’ve had divid­ed government.

Had Repub­li­cans not tak­en con­trol of the House of Rep­re­sen­ta­tives, the debt ceil­ing like­ly would have been raised in the same man­ner that it has been in the past. But the right wing thought that they could prof­it polit­i­cal­ly by mak­ing the pos­si­bil­i­ty of default seem real. And they devi­ous­ly car­ried out their threat, pre­cip­i­tat­ing a pho­ny cri­sis that was only end­ed by an eleventh hour deal.

Now, ignor­ing their own role in the deficit and debt ceil­ing show­down, they are on the attack, por­tray­ing the Oba­ma admin­is­tra­tion as inept and por­tray­ing the Stan­dard & Poor’s deci­sion to down­grade as proof.

But Stan­dard & Poor’s is hard­ly an insti­tu­tion that is qual­i­fied to lec­ture oth­ers on fis­cal respon­si­bil­i­ty. It is one of three rat­ings agen­cies (the oth­ers are Moody’s and Fitch) which com­plete­ly and utter­ly failed to blow the whis­tle on the bad bets that Wall Street was mak­ing. As Bethany McLean and Joe Nocera explain in All the Dev­ils Are Here (The Hid­den His­to­ry of the Finan­cial Crisis):

The rat­ings agen­cies had always been stingy about bestow­ing triple‑A sta­tus on cor­po­rate debt. In 2007, for instance, only six com­pa­nies had a triple‑A rat­ing. Yet when it came to tranch­es of mort­gage-backed secu­ri­ties, the rat­ings agen­cies hand­ed out triple-As like can­dy. Lit­er­al­ly tens of thou­sands of mort­gage-backed tranch­es were rat­ed triple‑A.

In the ear­ly years, the secu­ri­ties per­formed well. That was true even of the rel­a­tive­ly small batch of asset-backed secu­ri­ties that used sub­prime mort­gages. They had plen­ty of cred­it enhance­ments, and besides, hous­ing prices were going up, the way they were “sup­posed” to, which kept defaults to a min­i­mum. But the rat­ing agen­cies con­tin­ued to slap their triple-As on sub­prime secu­ri­ties even as the under­writ­ing dete­ri­o­rat­ed and as the hous­ing boom turned into an out­right bub­ble, wait­ing to burst. When it did burst, the rat­ing agen­cies, and the investors who had depend­ed on them, were caught flat-footed.

Nocera and McLean go on say that Wall Street’s house of cards sim­ply could not have been built with­out Stan­dard & Poor’s (and their two counterparts).

The rat­ings agen­cies were at the very heart of the mad­ness. The entire edi­fice would have col­lapsed with­out their par­tic­i­pa­tion. “Get the rat­ing out the door — that was it, says a for­mer S&P exec­u­tive. Once a tranche of a mort­gage-backed secu­ri­ty was stamped triple‑A, nobody ever went back and rean­a­lyzed it as it was rebun­dled into a CDO [CDO stands for col­lat­er­al­ized debt oblig­a­tion, or secu­ri­ties that com­prise the debt of dif­fer­ent com­pa­nies or tranch­es of asset backed securities].

Empha­sis is mine.

Giv­en that S&P failed to sound the alarm about Wall Street’s bad bets, why should we trust its analy­sis now? We should­n’t. S&P does­n’t deserve to be tak­en seri­ous­ly. What’s more, we actu­al­ly know for a fact that S&P is still mak­ing errors.

This isn’t just con­jec­ture or sus­pi­cion. Here’s John Bates, the Act­ing Assis­tant Sec­re­tary for Eco­nom­ic Pol­i­cy at the Depart­ment of the Trea­sury:

In a doc­u­ment pro­vid­ed to Trea­sury on Fri­day after­noon, Stan­dard and Poor’s (S&P) pre­sent­ed a judg­ment about the cred­it rat­ing of the U.S. that was based on a $2 tril­lion mistake.

After Trea­sury point­ed out this error – a basic math error of sig­nif­i­cant con­se­quence – S&P still chose to pro­ceed with their flawed judg­ment by sim­ply chang­ing their prin­ci­pal ratio­nale for their cred­it rat­ing deci­sion from an eco­nom­ic one to a polit­i­cal one.

Bates added:

S&P has said their deci­sion to down­grade the U.S. was based in part on the fact that the Bud­get Con­trol Act, which will reduce pro­ject­ed deficits by more than $2 tril­lion over the next 10 years, fell short of their $4 tril­lion expec­ta­tion for deficit reduc­tion. Clear­ly, in that con­text, S&P con­sid­ers a $2 tril­lion change to pro­ject­ed deficits to be very sig­nif­i­cant. Yet, although S&P’s math error under­stat­ed the deficit reduc­tion in the Bud­get Con­trol Act by $2 tril­lion, they found this same sum insignif­i­cant in this instance.

He con­clud­ed his state­ment sev­er­al para­graphs lat­er by say­ing, “The mag­ni­tude of this mis­take – and the haste with which S&P changed its prin­ci­pal ratio­nale for action when pre­sent­ed with this error – raise fun­da­men­tal ques­tions about the cred­i­bil­i­ty and integri­ty of S&P’s rat­ings action.”

We at NPI would argue the mis­take is just more evi­dence that the cred­i­bil­i­ty and integri­ty of S&P itself is shot. As Paul Krug­man put it:

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.

War­ren Buf­fett, who is one of the world’s wealth­i­est men and one of the coun­try’s most respect­ed investors, also crit­i­cized S&P, telling Bloomberg Tele­vi­sion that the Unit­ed States deserved a “quadru­ple A” rat­ing. He made sim­i­lar com­ments to Rupert Mur­doch’s Fox Busi­ness net­work. “In Oma­ha, the U.S. is still triple A. In fact, if there were a quadruple‑A rat­ing, I’d give the U.S. that,” Buf­fett said.

The time has come for the Unit­ed States of Amer­i­ca to down­grade the cred­i­bil­i­ty of Stan­dard & Poor’s. Why is it that we have rules that give S&P and its coun­ter­parts “almost Bib­li­cal author­i­ty” (as New York City’s for­mer finance admin­is­tra­tor Roy Good­man put it) when they are not neu­tral observers of the mar­kets, but rather for-prof­it com­pa­nies them­selves. The Dodd-Frank Wall Street reform bill based last year tweaked the rules to some extent, but it did­n’t bring about the real reg­u­la­to­ry changes that we need. The rat­ing agen­cies still enjoy an aura they don’t deserve when their rep­u­ta­tions should be in tatters.

On behalf of the peo­ple of this coun­try, Con­gress and Pres­i­dent Oba­ma ought to let S&P know what we col­lec­tive­ly think of their cred­i­bil­i­ty by strip­ping the rat­ing agen­cies of their legal role in eval­u­at­ing credit.

About the author

Andrew Villeneuve is the founder and executive director of the Northwest Progressive Institute, as well as the founder of NPI's sibling, the Northwest Progressive Foundation. He has worked to advance progressive causes for over two decades as a strategist, speaker, author, and organizer. Andrew is also a cybersecurity expert, a veteran facilitator, a delegate to the Washington State Democratic Central Committee, and a member of the Climate Reality Leadership Corps.

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