Why Are Discredited "Agencies" Like S & P Dictating Our Economic Future?

By Richard (RJ) Eskow, July 24, 2011, cross-posted from Campaign for America's Future.

"Who does Standard & Poor's think it is?" asks Matt Miller, the reasonable and congenial host who represents the "center" on NPR's "Left, Right, and Center." Miller's understandably outraged that this discredited organization still has so much power and influence. But he's asking the wrong question.

S&P knows exactly what it is, and so should everyone else. It's the for-profit company which, while masquerading as a credit rating "agency," bartered its coveted AAA ratings for increased profits. The real question is why? Why does S&P still have the power to cost the government billions of dollars in added interest payments, which is what would happen if they downgraded our credit rating?

The pronouncements of these for-profit "agencies" have no more credibility than the murmured compliments of an overpriced escort in a candlelit hotel room. So why do they still have the power to endanger the financial security of millions of Americans?


Change of Heart

S&P's threatening to downgrade the government unless there's a $4 trillion deficit deal within 90 days. That's a demand, a timeline, and a figure it had never mentioned before. Ezra Klein reminds us that in October they had concluded our AAA status was 'stable' for the foreseeable future, and that in April they had said we needed to address the deficits within two years rather than 90 days. Klein asked what changed.

The more you think about the response from S&P's David Beers, the less sense it makes. "We live in a dynamic world," said Beers. "... (T)he idea that we or anybody else who does analysis around U.S. public finances would have a fixed and unvarying view over time is simply naive." But the US government wasn't overthrown between April and July. Nothing has radically changed. Taken to its logical conclusion, Beers is arguing that it's "naive" to believe that today's opinion won't be radically different from one offered six months earlier or three months later.

The logical next question goes unasked: Why should such unpredictable opinions be given any weight? How can you tell me what will happen to an entire nation in five or ten years, when you can't even tell me what your own opinion will be three months from now?

Politics as Usual

S&P's warning mentioned the "Rising Risk Of Policy Stalemate," and Beers says "politics" changed their assessment. Or to put it in Klein's words, that "America is not acting like a country that deserves a AAA-credit rating." Klein adds: "Nice job, Congress."

Except that Congress hasn't been acting in a vacuum. Yes, Republicans have acted wildly and recklessly. But senior Administration officials have been privately saying for years that they want to cut government spending on entitlements and other programs. That seems to reflect an economically conservative worldview and fits nicely with the President's "post-partisan" re-election strategy. To all appearances, the White House has been using the Republican House as a "bad cop" to serve its own endgame.

But none of this is news, and none of it explains this new pronouncement - or the sudden appearance of the $4 trillion target as S&P's make-or-break number.

A Proven Record of Failure

Beers was practically thumping his chest when the Wall Street Journal caught him on his way to meet with Congressional Republicans. "You have to call these things as you see them," he said, "and that's what we are committed to doing."

You'd never know that 90% of the subprime-backed mortgage securities S&P and its competitors rated AAA in 2006-2007 - which means they're as sound as Treasury notes - were later downgraded to junk bond status. But he's right about one thing: It is naive to expect S&P or its peers to be reliable or dependable. That commitment to "calling things as they see them" was nowhere to be found when they were giving out ratings like they were party favors.

"Agencies" like S&P trade on the quasi-governmental ring that the word "agency" provides, but executives at S&P and the other raters are charged with increasing revenues and profits to boost profits. And that's one part of their job they take seriously - so seriously, in fact, that Sen. Levin's Permanent Subcommittee on Investigations made this observation: "The ratings agencies weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom."

Republican Senator Tom Coburn characterized these "agencies" as "key enablers of the financial meltdown." S&P rolled over when Goldman Sachs complained about S&P's original rating for a collateralized-debt obligation called Abacus 2006-12. Abacus was at the heart of the government's lawsuit against Goldman Sachs, which eventually paid $550 million to settle charges of market manipulation.

Because of the bipartisan "reforms" passed in the 1990's, products like Abacus were completely unregulated at the time. Only pseudo-agencies like Standard & Poor's were left to protect the public and investors from malfeasance and fraud. They failed. But then, why wouldn't they? Their business model, which has yet to change, creates the perfect incentive for just such failures.

The Levin Subcommittee's documents provided a tantalizing trail for Justice Department investigators to follow and opened the door for members of both parties to push for massive reforms. Instead the agencies got a free pass to carry on as they had before. Some officials may be regretting that generosity. Recently Administration officials went to the ratings corporations with hat in hand, begging them not to downgrade the US government's AAA rating, and were dismissed with imperious scorn. 

Confusion ... or Cover? 

If logic doesn't explain this sudden move by Standard & Poor's, what does? Is this "agency" once again trading on its influence to please the Wall Street banks that are its bread and butter? Or is it all just a coincidental confluence of opinion and events? That gets us into the realm of speculation. But it's funny how it's all working out, isn't it?

S&P emerged from its scandal more powerful than ever. Its latest ruling is a politically useful one that provides cover for an unpopular move, and Republicans (as well as some Democrats) are already using that way. PCCC polling shows that 80% of voters polled in the front-line states oppose cutting Social Security, Medicaid, and Medicare to fix the deficit, and strong majorities want higher taxes for the wealthy. (Note to those who say they're looking for the "center": You just found it.)

Now the stars are aligning in a way that lets politicians do exactly what the public doesn't want. Democrats and Republicans can each blame each other, and they can both blame Standard & Poor's "objective" findings. The passage of this wildly unpopular economic program could become a murder scene with no fingerprints - and with more suspects than an Agatha Christie novel.

And like an Agatha Christie novel, they might all turn out to be guilty - that is, unless Democrats in the House and Senate hold the line against any agreement that hits the poor and middle class while sparing the wealthy.

Speaking and listening

"The question isn't whether S&P should be listened to," says Ezra Klein. "It's whether the market will listen to them." But even that's not the right question. It's not "who's listening to Standard & Poor's?" but "who is Standard & Poor's listening to?"

We may never know. But politicians are still required to ask voters a question from time to time, too: Can I count on your vote? If your answer depends on the way they handle these deficit talks, this would be a good time to let them know.

They've heard from Standard & Poor's, but they probably haven't heard from you.