Why is Standard and Poors out in front of all the other credit ratings agencies in pointing a gun at the US debt rating? Because a guy named David Beers says so:
As the London-based managing director of sovereign credit ratings at Standard & Poor’s, Beers will help determine whether the U.S. government’s credit rating will be downgraded as a result of the battle over raising the debt limit.
His company has gone beyond competing credit-rating agencies to say that it isn’t enough for lawmakers to agree to lift the government’s $14.3 trillion debt ceiling. Congress and the White House also must agree to a deficit-reduction package to avoid a downgrade in the government’s AAA credit rating.
In an interview this week at Union Station, just blocks from the U.S. Capitol, Beers said he views the debt limit fight as a test of lawmakers’ willingness to tackle the deficit.
“For us, the issue is not the debt limit — it’s the underlying fiscal dynamics,” said Beers, who has been rating governments for the company for 20 years. “It’s not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now.”
Like Robert Reich, I don’t recall Beers grumbling about extending the Bush tax cuts last December, which punched the $4 trillion hole in the deficit that they now say must be compensated for in a debt ceiling package.
Instead, Standard and Poors waited until April 18 to say there was a one-third chance of a US downgrade — four days after the President announced his plan for cutting the deficit. On July 14 they announced there was a 50% chance they will downgrade the US credit rating in the next 90 days unless a $4 trillion package to reduce the deficit was passed.
What are the consequences if Beers, like Cesar, gives the thumbs down to the US? Because there is no feasible way for their $4 trillion target to be reached by mid-August. Nobody can say for sure what the impact would be, but as the Washington Post notes it would certainly increase the cost of borrowing for the US:
Its AAA rating identifies U.S. Treasury bonds as one of the world’s safest investments — and has helped the nation borrow at extraordinarily cheap rates.
A downgrade would drive up the cost of borrowing and throw into question the global role of the Treasury bond. The Treasury serves as a crucial risk-free place to invest money — and has been a stalwart of stability amid the economic upheaval of the past few years.
The ratings agencies have been downgrading the credit ratings of states like Wisconsin and Indiana already, which has increased their cost of borrowing, which has forced them to sell off assets like highways and zoos and parking meters in order to meet their budgets. How convenient that big Wall Street private equity firms have taken enormous cash positions in order to be able to sweep up bargains in this fire sale.
What Standard and Poors is demanding from the US will not only force deep cuts to domestic programs like Social Security and Medicare, it will also make matters worse for the states (NYT):
If they really make some severe cuts, that is deleterious to the municipal bond space,” said Marilyn Cohen, chief executive of Envision Capital Management, which manages bond portfolios. “That means less trickle-down to the states, cities and counties.”
Perhaps the most serious consequence of a downgrade is that it could force funds that cannot hold assets rated below AAA to divest treasury holdings from their portfolios (NYT):
One of the worst possibilities that people in the financial industry, like Mr. Lengsfield, have been discussing is that scores of insurance companies, pension funds and mutual funds might be forced to dump their Treasury holdings. Some investors have rules that they cannot hold assets that are rated below AAA. It was this sort of rule that drove the forced selling of mortgage bonds during the financial crisis.
That’s just what the fragile economy needs right now, a sell-off of US treasuries and an increase in interest rates. Because David Beers says so.
It was Beers who put S&P out there in front of every other credit ratings agency. They broke the IOSCO code of conduct, as well as their own, when they put a $4 trillion price tag on the deficit package they require. They played politics again when they recently adjusted the way that they assign credit ratings to states so they could ding them for meeting their pension fund obligations, and in May they rewarded Scott Walker with a AA rating for his actions in Wisconsin
Standard and Poor’s meets with Treasury officials, and then meets with big investors like Pimco and tells them their private thoughts on the looming debt downgrade that they do not share with the public. How is that not a “misuse of material nonpublic information?”
Rule 17g-4 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 covers “Prevention of Misuse and Material Nonpublic Information,” and says:
|a. The written policies and procedures a nationally recognized statistical rating organization establishes, maintains, and enforces to prevent the misuse of material, nonpublic information pursuant to section 15E(g)(1) of the Act must include policies and procedures reasonably designed to prevent:
By meeting with big investors like Pimco and telling them that they support the Reid plan over the Boehner plan, Standard in Poor’s is unquestionably in violation of (1) above when they give them information that they do not make available to the public.
Moreover, as Dday notes, this is all game playing. S&P’s chief economist David Wyss says that “as a firm, we take no stand on whether the deficit should be cut through lower spending or higher taxes.” But if they are now demanding a $4 trillion deficit package within 90 days, they leave no room to allow the situation to be resolved by simply not renewing the Bush tax cuts.
The Huffington Post reports that Janet Tavakoli, president of the Chicago-based consulting firm Tavakoli Structured Finance, says that credit ratings agencies deserve to have their government seal of approval revoked:
“Either through intention or incompetence the rating agencies lied in the sense that they made false statements that had grave consequences for investors and the global financial markets,” Tavakoli says in the report, dated Tuesday.
“The rating agencies do not merit the [Nationally Recognized Statistical Rating Organization] designation,” or the government stamp that makes ratings a centerpiece of the regulatory structure, Tavakoli says.
Beers himself briefed GOP members of Congress in a closed door meeting as recently as July 21 (photo above). He has taken Standard and Poor’s way, way over the line regarding the role that ratings agency can legitimately play. He has repeatedly inserting himself and the organization in a political game while the world economy hangs in the balance.
If Standard and Poors downgrades the US debt, it will have serious consequences for both the US economy and the 2012 election. Beers has a clear political agenda, and he should not be allowed to crown President Romney. It should not be a partisan issue. Nobody who respects the right of voters to determine the outcome of an election should want an organization to have that kind of sway over elected political leaders.
The SEC should quickly investigate these clear violations of securities law on the part of David Beers and Standard & Poors, and strip them of their power to rate securities in the United States before they have the opportunity to inflict more damage than they already have. Why they still retain any authority at all, after the role they played in the 2008 financial meltdown, is a complete mystery.
To quote the great Bill Greider, “what a load of crap.”
Photo above from the Flickr page of Rep. Nan Hayworth, R-NY