The PMS of S&P
So S&P finally did it. They’ve been dangling the threat of a downgrade of US debt since last October — following the passage of Dodd-Frank bill, which made it easier for their victims to sue them for their role in the mortgage meltdown.
But the reason they gave for the downgrade seems to have shifted over time:
In October 2010: “As the baby boomers start to reach retirement age, the percentage of the U.S. (AAA/Stable/A-1+) population needing government support will begin to mount. The babies who were born in 1946 turn 65 next year, which means they’ll become eligible for Medicare. And when they decide to retire, they’ll start collecting Social Security payments as well. But there’s a huge problem brewing: The U.S. government is not collecting enough money to pay the bills.”
Pretty straight forward neoliberal, Wall Street-centric “the US needs to tighten its belt and cut Social Security and Medicare or they will run out of money” claptrap. No mention of the trillion dollar wars the US is currently waging.
In December 2010: Complete silence as Congress both parties get together and pass an extension of the Bush tax cuts, which adds over $2.6 trillion to the deficit.
In February 2011, the President releases his budget, which cuts the deficit by $1.1 trillion. “Standard & Poor’s Chief Economist David Wyss said the budget was a ‘step in the right direction’ but more was needed to be done in order to tackle entitlement spending.”
It’s all about the big, bad welfare state.
But in April 2011, Paul Ryan releases a budget that reduces the deficit by $4.4 trillion. Obama then releases a budget that reduces the deficit by $4 trillion. S&P responds by downgrading the outlook of the AAA rating from stable to negative because “The Republicans and Democrats are deeply divided on a plan to reduce debt.” What are they concerned about specifically? Well, they say “the Republicans blame government spending for the debt situation, and suggest that new taxes aren’t a solution, while the Democrats want to finance debt reduction with higher taxes on the wealthy.“ (Astute observers will note that the Democrats gave up on “higher taxes for the wealthy” in the final debt ceiling deal.)
Their focus is all on politics now. Missing from the press release? Any mention of the words “Social Security,” “Medicare,” “entitlements” or “Cadillac-driving welfare queens.”
In retrospect, as DDay said at the time, maybe it wasn’t the best idea for both parties to be validating S&P as arbiters of the situation.
July 2011: S&P places the US AAA long-term rating on CreditWatch with “negative implications.” What is their reason this time? “We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon,” they say. “If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.”
S&P is violating the IOSCO code of conduct, and their own, by explicitly saying they would give a rating in the future based on a specific criteria that they haven’t mentioned before ($4 trillion in deficit reduction). Of course the problem could be resolved by simply allowing the Bush tax cuts to expire later in the year, but because they call for the situation to be resolved in 90 days, they close the door on that possibility. Nice racket.
Entitlements…partisan bickering…$4 trillion…what’s next?
July 2011: S&P Chief Devan Sharma testifies before the House Financial Services Committee that S&P was “misquoted” regarding the $4 trillion figure “We do not comment on any specific plan or the political choices or policy choices being made. We are just commenting on what is the level of debt burden, what is the level of deficit that must meet the threshold to retain its AAA.”
Okay, so scratch the $4 trillion thing.
August 2011: S&P downgrades the US sovereign credit rating because the debt ceiling deal “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”
I guess they really meant that $4 trillion business after all.
What has changed since April? “Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.”
Um…in April they were worried that the Republicans only wanted tax cuts, and Democrats were fixated on “debt reduction with higher taxes on the wealthy.” Did they fail to notice that didn’t turn out to be a problem?
The WSJ says that S&P made a $2 trillion error in their calculations, but after the Treasury pointed it out to them, they decided to downgrade them anyway. Just because.
Neither Moody’s nor Fitch downgraded US debt at this time. And S&P can’t quite come up with a consistent answer about why they are out there by themselves. It’s like they looked at a public opinion poll, decided that there was no way anyone would argue with “partisan bickering” as a justification, and crossed their fingers that nobody would actually question what it is that they are justifying.
S&P is playing footsie with the Republicans, who are passing bills to relieve them of the legal liabilities that Dodd-Frank exposes them to — even as the SEC is investigating S&P for fraud in the mortgage meltdown.
Some said that S&P wouldn’t dare downgrade the US debt. But it was all over four days ago when Pimco’s Mohammed El-Erian said that S&P was “under pressure” on the US rating.
If you didn’t happen to catch Devan Sharma’s testimony before the House Financial Services Committee last week, this was what he said:
As Dodd-Frank rulemaking progresses, we believe it is critical that new regulations preserve the ability of NRSROs to make their own analytical decisions without fear that those decisions will be later second-guessed if the future does not turn out to be as anticipate or that in publishing a potential controversial view, they will expose themselves to regulatory retaliation.
Pressures of that sort could only undermine the significant progress we believe has been made over the years by rating agencies and regulators alike to provide the market with transparent, quality and generally independent views about the credit-worthiness of issuers and their securities. I thank you for the opportunity to participate in the hearing and I would be happy to answer any questions you may have.
That’s what Rep. Randy Neugebauer, chairman of the House Financial Services Subcommittee said on April 29, when he requested documents from the administration: Treasury officials “may have exerted too much pressure on S&P.” The Republicans were already laying the tracks for S&P’s defense in April.
Here are a few more dots to connect the timeline:
- April 18: Mitt Romney: “The Obama presidency was downgraded today.”
- April 20: Mitt Romney: “Standard & Poor’s, one of the rating agencies, just downgraded their view of the future for America…If you will, they downgraded the Obama presidency.”
- July 15: WSJ — “The Obama downgrade.”
They’ve been cooking this one for a while. S&P will defend themselves from the accusation of overt partisan manipulation by claiming the Treasury “pressured” them not to downgrade US debt. The media will focus on what Geithner did or didn’t say during his meetings with S&P in March and April. Nobody will ask about the ridiculous excuses S&P has made for the downgrades, or the fact that they are trying to wreck the American economy just as they did the British economy by playing God with their austerity prescriptions.
People are focused on the market implications of the downgrade, but that isn’t what this is about. It’s about a President who will now be relentlessly tagged with responsibility for a rating given by a disgraced organization whose victims should have liquidated them long ago.
As Politico reported, White House officials feared a downgrade more than they feared default. They know what it means, too. The Masters of the Universe have spoken.
Other posts in this series:
- July 29 – Is Standard and Poor’s Manipulating US Debt Rating to Escape Liability for the Mortgage Crisis?
- July 29 – What Is Standard and Poor’s Agenda? Because It Ain’t About Default Risk or Economics
- July 27 – Standard and Poor’s Should Not Be Able to Play Kingmaker in the 2012 Election
- July 26 – Wall Street’s Enforcers: Standard and Poor’s Imposes Shock Doctrine 2.0