THE BLOG
08/08/2011 10:18 am ET Updated Oct 08, 2011

A Corrupt S&P Uses Shock Doctrine to Help Push Wall Street's Conservative Political Agenda

S&P's opinion on debt ratings should have almost no credibility.

S&P is the same private profit-making corporation that was paid tens of millions of dollars by Wall Street banks to rate its toxic subprime mortgages and derivatives, giving them phony AAA ratings. S&P's conflicts of interest played a key role in causing the housing bubble and the resulting financial crisis that led directly to the Great Recession, the loss of millions of jobs, and the ballooning of the Federal debt.

Now this very same private company whose malpractice helped balloon the Federal debt turns around and downgrades the US debt rating due to its own political, rather than economic, analysis.

There is absolutely no reason to believe that bonds backed by the full faith and credit of the United States of America will not be repaid, which would be the sole reason to downgrade their credit rating.

Indeed global credit markets have acting like they fundamentally disagree with S&P that the U.S. government represents a credit risk. Since early 2011 -- during the very period in which Congress has been debating the debt ceiling increase -- the interest rate on 10-Year US Treasury Bonds have decreased by nearly 1/3 from over 3.6% to around 2.5%. If global financial markets -- which reflect the collective economic views of investors around the world -- believed that there was any credible risk that the US government wouldn't pay them back, would they be pouring trillions of dollars into US government debt at near record-low interest rates?

But S&P has apparently decided that the markets are wrong. And in doing so, they will likely impact credit markets and increase the interest on US debt, forcing the US government, as well as individual American citizens and corporate borrowers, to pay tens or hundreds of billions of dollars more in interest, further increasing the deficit.

By S&P's own admission, its downgrade decision was made more for political than economic reasons. In its Press Release justifying the downgrade, S & P stated:

"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements (emphasis added), or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process".


Early Friday afternoon when S&P first contacted the Treasury Department to alert it to the pending downgrade, John Bellows, Acting Assistant Secretary for Economic Policy, found a $2 trillion "basic math error" in S&P's calculations and alerted S&P. According to Bellows, S&P acknowledged the error in private conversation with Treasury but proceeded to issue their downgrade anyway and "simply removed a prominent discussion of the economic justification from their document", focusing less on the economics and more on the politics. As Bellows wrote on the Treasury Department's website,

The impact of this mistake was to dramatically overstate projected deficits--by $2 trillion over 10 years. As anybody who has followed the fiscal discussions knows, a change of this magnitude is very significant. Nonetheless, S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment, or even significant enough to warrant another day to carefully re-evaluate their analysis...

Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. ..The magnitude of this mistake -- and the haste with which S&P changed its principal rationale for action when presented with this error -- raise fundamental questions about the credibility and integrity of S&P's ratings action (emphasis added).

S&P's response was that a mere $2 trillion error in their calculations was no reason to reconsider their downgrade. On a Saturday conference call with reporters, top S&P executives said the "the 'extremely difficult' political discussions in Washington over how to reduce the more than $1 trillion budget deficit carried more weight in their decision than the nation's outstanding debt."

In other words, S&P itself admitted that its downgrade decision was more political than economic. This goes way beyond the traditional role of credit rating agencies. WTF?

S&P's top executives are not political naifs. They certainly knew that S&P's decision would be a political bombshell that won't just reflect the American political debate but fundamentally reshape it.

Since they know full well that all but a handful of Republican House and Senate members have signed Grover Norquist's pledge to never raise a single tax or close a single loophole, they understand that Congressional action aimed at appeasing S&P's executives and restoring America's AAA rating can only come from further spending cuts and moreover, to be large enough, they must come from cuts to Medicare, Medicaid and Social Security.

Moreover, they understand that whatever the short-term political fallout -- whether more Americans blame Republicans or Democrats -- in the longer run S&P's downgrade will harm President Obama's reelection chances. Although in my own view Obama has been far too lenient on Wall Street, Wall Street is lobbying furiously to undermine even the modest financial regulation in the Dodd-Frank Financial Reform Act. This will be far easier with a Republican President and Republican control of both Houses of Congress in 2012. Republicans will relentlessly attack Obama as "the first President in history on whose watch America's AAA credit rating was downgraded." And as S&P executives must surely know, this will impact the 2012 elections.

This almost feels like a replay of Bush v. Gore, except this time it's a private, profit-making, corporation, not a 5-4 majority of Republican-appointed Supreme Court justices, that may play a big role in determining the next President.

The general public does not understand that by their very nature, S&P and the other major credit-rating agencies are inherently corrupt. People assume that they are neutral judges -- something like Consumer Reports -- with no economic self-interest in coming to one conclusion or another. This is completely false.

The credit rating agencies make a substantial portion of their profits from payments from Wall Street banks to rate the very securities that that the bankers are selling. As reported in Simon Johnson & James Kwak's book 13 Bankers,

According to Jim Finkel of Dynamic Credit, which created structured products, 'Wall Street said, 'Hey, if you don't [give me the rating I want], the guy across the street will. And we'll get them all the business.' And they just played the rating agencies off one another.'

One of the 10 key findings of the Congressional Committee charged with investigating the causes of the 2008 economic crisis was the following:

We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly...This crisis could not have happened without the rating agencies.


It is this financial crisis that S&P helped create which has increased the federal debt to the tune of several trillion dollars by decreasing economic activity leading to decreased tax revenues and increased government payments to mitigate the effects of the downturn through things like the bank bailout, increased unemployment payments, increased Medicaid payments, and a necessary, but too-small stimulus program.

As Paul Krugman wrote on his blog this weekend,

It's hard to think of anyone less qualified to pass judgment on America than the ratings agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

...In short, S & P is just making stuff up -- and after the mortgage debacle, they really don't have that right...So this is an outrage.

S&P's downgrade demonstrates the "Shock Doctrine" in dramatic action. Republicans create an artificial crisis by, for the first time in history, making the raising of the debt ceiling not an automatic piece of housekeeping but a hostage to their political goals. Then, when the debt ceiling is raised after John Boehner crows that he achieved 98% of his political goals, a corrupt and conflicted S&P follows in behind and downgrades America's debt ceiling anyway for transparently political reasons. The result is likely to be increased pressure to cut Medicare, Social Security and Medicare, and perhaps even to significantly influence the results of the 2012 election to favor Republicans.

The U.S. government and the Obama administration has plenty of tools to make S&P and the other credit agencies think twice before continuing to use their undue influence to meddle in American politics. The Senate should hold hearings on whether S&P allowed political calculations to influence their debt ratings. And the Justice Department should conduct criminal investigations of the credit agencies' practices in effectively taking Wall Street bribes to give AAA ratings to subprime mortgages and derivatives. The Securities and Exchange Commission -- which has regulatory oversight of the ratings agencies -- should open an investigation of possible civil violations. This weekend police in Milan raided the office of S&P and Moody's as part of an investigation on their role in creating financial turmoil. That's more like it.

The Federal Government has plenty of power to punish a rogue credit rating agency. It's time for the Obama administration to strike back at its political enemies, not appease them. And S&P has clearly declared itself the enemy not only of the Obama administration but of the American people. Hit S&P in its pocketbook, the only thing it ultimately cares about.

If the US government starts legal investigations of S&P, it will, of course, be accused of being political and seeking retribution from the ratings agencies. But it is the ratings agencies that have corrupted and politicized the ratings process. And this may be the only way to get the media to pay attention to the corruption baked into the very heart of the ratings agencies' business model.

As it is, the media reports the S&P downgrade like its nothing but an objective evaluation by an unbiased and neutral arbiter. Where are the reports on ABC, CBS, NBC, AP, USA Today, Time Magazine, and other major media outlets investigating whether S&P's ratings are inherently biased by conflicts of interest and based upon political considerations they have no right to use? Outrageous!