Standard & Poor's Getting Heat for Downgrade Decision.

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According to a Reuters report, the Securities and Exchange Commission is “reviewing” the decision of rating agency Standard & Poor’s to downgrade the federal government’s credit rating.

The decision to issue a downgrade—despite the fact that interest rates for US Treasury bonds remain at near-historic lows, and a lack of any evidence the country won’t be able to honor its obligations—has already been criticized by several powerful Washington players. Senator Tim Johnson, chairman of the Senate Committee on Banking, Housing and Urban Affairs, blasted the decision last week in a statement. “In the minds of serious, reasonable, and informed individuals there is no doubt that the US will meet its debt,” he said. “I am deeply disappointed in S&P’s decision to enter into the game of political punditry.”
 
An aide told me the Banking Committee is “looking into the issue and gathering information.”

The SEC’s review is made possible by the Dodd-Frank financial reform bill, which gave the agency expanded power to review the actions of rating agencies like Standard & Poor’s. The SEC cannot second-guess a rating decision outright, but can, however, make sure the issuing agency followed its own guidelines.

The current review into the downgrade decision is focused on Standard & Poor’s transparency rules, according to one Reuter’s source—whether, for example, the Standard & Poor’s committee held the necessary meetings on the decision. Given the very curious nature of the downgrade, it will be interesting to see if Standard & Poor’s complied with transparency rules in making it.
 
The SEC is also already undergoing a broader examination of all rating agencies, as required by the Dodd-Frank reforms. The agency will issue that report sometime in December. It has already removed references to the opinion of private rating agencies from federal guidelines, and created a separate metric for evaluating investments that could be used as an alternative to the current rating agencies.

If Standard & Poor’s was motivated to issue their downgrade as an assertion of power against increasing regulation, the SEC review would indicate the government is not cowed.

An alternate, or perhaps complimentary, theory of Standard & Poor’s downgrade decision is that the agency was trying to appear tough after having endorsed the mortgage-backed securities that eventually destroyed the economy. Last week, University of Massachusetts professor Robert Pollin told me that perhaps Standard & Poor’s was trying to create the impression that “they’re hardnosed, they’re courageous; this is their best objective analysis. All of a sudden, after being shill for the financial bubble, they’re going to be hard-nosed.” He added that perhaps Standard & Poor’s was trying to appear more decisive than the other two rating agencies, Fitch and Moody’s.

If that was indeed the strategy, it too may be backfiring. Amidst SEC and Senate “reviews,” and harsh comments from other prominent politicians about Standard & Poor’s, the rival agency Fitch announced this morning it is reaffirming the United States’ AAA rating and said it doesn’t anticipate downgrade.

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