Thursday, August 11, 2011


How do you feel about Standard & Poor's decision to lower the U.S. debt rating from AAA to AA+? I am extremely distressed -- for many reasons.

First, I challenge the idea of any private body setting itself up as an arbiter of which countries or organizations are creditworthy or not, unless every person on its decision-making board has its resume published widely and there is proof that each individual is qualified and totally clean -- based on security checks. It takes a large dose of audacity and chutzpah to announce that the group of "deciders" must remain secret to protect the integrity of the decision and the organization.

Next the track record of the rating group must be published with every decision, so its analytical skills can be reaffirmed. Have its ratings been correct in the past? This is not a case where batting even .400 works. For a rating agency to have stature, it must bat close to 1000. The S&P rating on the U.S. wreaked havoc in financial markets all over the world, and millions lost billions. And yet without looking too deeply into S&P's past, we find that this so-called "ruling body" is none other than the group that gave triple A ratings to banks issuing subprime mortgages -- the prime cause of the financial crisis. Likewise it gave AAA to Lehman Bros. just before that company went under. With a track record like that, S& P should have been restricted by the SEC from issuing further ratings and the backgrounds and political independence of its "judges" checked. This, in its own way, is a bigger travesty than the Madoff scandal -- as more money was lost between the financial crisis and the recent downgrading.

S&P knows its reputation is sullied and must regain credibility. Was there any effort to do this after everything went bust? I never saw a mea culpa. I never heard of programs to clean up its act internally and revitalize its staff. Nor were there authority-building op-eds or white papers. So, as I see it, this anachronistic group saw a long delayed opportunity to rebuild its credibility -- or so it thought -- with a single stroke that would garner headlines around the world.

The unsophisticated would bow down. Some of the more knowing might think the wake-up call was worth it. But many, many others would recognize the ploy. Once the debt ceiling was raised -- plus the variety of options available to the U.S. to cut spending and raise revenues -- default was not in the cards. Hopefully, the SEC has been given a wake-up call about setting standards that ratings agencies must meet.

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