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Questioning S&P’s political judgment
Associated Press
WASHINGTON
The S&P downgrade was more of a statement on the toxic political landscape in Washington than a comment on the nation
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217;s ability to pay its bills. But S&P has its own checkered history. Just a few years ago, the company gave its top triple-A rating to some of the mortgage-backed securities that helped cause the Great Recession.
Could it be wrong again?
New York-based Standard and Poor’s was upfront about its focus on the political angle, citing the long standoff between President Barack Obama and Congress as a key factor in its unprecedented downgrade of the government’s credit rating.
“We think the debacle over raising the debt ceiling is one illustration of that,” John Chambers, head of S&P’s debt rating committee, said Monday. He said that the political gridlock and S&P’s analysis of a rising U.S. debt burden in coming years prompted the downgrade.
Yet the credit-rating industry itself has been harshly criticized since the financial crisis of 2008-09, and S&P’s downgrade seems certain to increase congressional scrutiny.
The company was hardly revealing anything that wasn’t already well known by financial markets, politicians, analysts and probably most everyday Americans: The divisive political atmosphere in Washington has been leading to near-paralysis.
But is the rating agency qualified to make political as well as economic judgments?
Some lawmakers and economists have questioned whether the ratings agencies have the competence to evaluate the country’s finances, based on their own performance prior to the 2008-09 financial crisis.
S&P predicated its downgrade “on the theory that Washington might deliberately refuse to pay its debt because of a political impasse. But I don’t know what makes them experts at this,” said Rep. Brad Sherman, D-Calif., a member of the House Financial Services Committee.
“S&P’s main job is rating private issuers, and they have some expertise in that, although obviously they got it pretty wrong in mortgage-backed securities,” he said.
Leading up to the financial meltdown in 2008, S&P and its sister credit-rating agencies gave coveted AAA ratings to some of the very mortgage-backed securities that later became nearly worthless, leading to staggering losses for many investors and funds.
Also, the rating agencies had awarded top ratings to some of the financial firms that failed.