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Home Publications Blogs Beat the Press S&P's Warning on U.S. Debt Prompts Another Front Page Washington Post Editorial

S&P's Warning on U.S. Debt Prompts Another Front Page Washington Post Editorial

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Tuesday, 19 April 2011 06:58

The Washington Post, which routinely uses its news section to promote its editorial positions, ran a front page editorial on the implications of S&P's announcement that it has a negative outlook on U.S. debt. The piece asserted that:

"a downgrade [of U.S. debt] would drive up the cost of borrowing and throw into question the global role of the Treasury bond."

Actually, it is not at all clear that a downgrade would have this effect. The interest rate on 10-year Treasury bonds fell by 3 basis points yesterday. This indicates that investors were not too troubled by the risk of a downgrade.

S&P did downgrade Japan's debt back in 2002. This had no notable impact on the market at the time. Currently Japan pays less than 1.5 percent interest on its 10-year government bonds, the lowest of any country in the world. Since S&P's downgrade did not seem to force Japan to pay higher interest rates, it is not clear why the Post would expect that a downgrade would force the U.S. to pay higher interest rates.

It also would have been helpful to provide readers with some background on S&P. It rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade at the peak of the housing bubble. It also gave top ratings to Lehman, AIG, Bear Stearns, and Enron until just before their collapse. In other words, it has a dismal track record which may be one reason why investors seem to ignore its assessment of sovereign debt.

Finally, S&P is also involved in a major political battle at the moment. An amendment proposed Al Franken would end the current system under which a company issuing a bond selects the rating agency. Instead the Securities and Exchange Commission would pick the agency. This amendment would remove the obvious conflict of interest from having the issuer select the rater.

This change was delayed for 2 years by a conference provision inserted by Representative Barney Frank, who was head of the Financial Services Committee at the time. S&P would undoubtedly like this delay to be made permanent. 

It would have been appropriate to discuss S&P's track record as well as its political interests in a major story like this in order to provide readers with a better basis to assess its debt warnings. However S&P's warnings coincide with the Post's editorial stance calling for major cuts to Social Security, Medicare and other areas of social spending. This could explain the failure to provide readers with the necessary background information. 

Comments (10)Add Comment
Is this blackmail by S and P?
written by Robert Baillie, April 19, 2011 7:44
Given S and P's dishonest performance several years ago, and their political agenda, I have to wonder whether this is blackmail on their part.
...
written by skeptonomist, April 19, 2011 7:57
Having the SEC choose the rating company is no more than a band-aid, and would probably not have avoided the MBS debacle. The companies still work for the issuers and share interests with banks. A bad rating for conventional bonds of a particular company or municipality does not have much impact on the rating companies, but everybody was profiting from the proliferation of MBS's - a whole new source of income was being created. The private rating system worked for a long time, but the financial industry has figured out how to subvert it.
...
written by foosion, April 19, 2011 8:35
This morning NPR ran Eric Cantor saying the S&P action proved he was right, but did not run any Democrat saying it proved the Dems were right.

I've been looking for a bill that S&P wants to influence. The Franken bill is the clearest explanation for S&P's action.

The market certainly didn't care. As noted, treasuries and the dollar didn't regard this as meaningful news.
Credit Ratings and SEC are Redundant in Efficient Markets
written by izzatzo, April 19, 2011 9:19
Instead the Securities and Exchange Commission would pick the agency. This amendment would remove the obvious conflict of interest from having the issuer select the rater.


It's good to know that in efficient private markets with zero transaction costs the SEC has access to the same Paul Ryan Choice Vouchers as ordinary persons on the street recently made equal to corporations like S&P.

With so much choosing and freedom going on in free markets it's obviously not possible for debt issued by the USA to be downgraded. It's like hundred dollar bills on the sidewalk that are never there.

If the risk of debt had increased it would already have been downgraded and it didn't so it wasn't.
Why Doesn't S&P Like Franken's Amendment?
written by whoisjoe, April 19, 2011 9:52
Regardless of the effectiveness of the SEC selecting the rather (which I agree is suspect), it's not obvious to me how the amendment would affect raters like S&P.

I have trouble believing that S&P and other major raters would stand to lose anything under this scheme.

Can someone explain why S&P wants this amendment to go away?
...
written by PeonInChief, April 19, 2011 9:59
The companies issuing the bonds would naturally select the rating agency promising the best rating. The real problem is that they make their money rating the bonds, so they're likely to rate bonds according to the fees paid. In addition, they're protected by law from having to take responsibility for their ratings.
Hidden Layer of Ratings Continues to Fail
written by Union Member, April 19, 2011 10:18

The Washington Post, The Wall Street Journal, The New York Times and journalism in general is a ratings agency for the Ratings Agencies themselves. It was and is their job to provide transparency and expose conflicts of interest to investors and the Public (tax-payers and consumers)

Not only has journalism failed in this vital responsiblity, it has enabled ("incentivised") corruption and incalculable losses and destablized the entire financial system due to their own low editorial standards and conflicts of interest.
And of course they want to blame government and make the public pay for it.
The Washington Post and Murdoch (WSJ) have been especially entrepreneurial in the conflicts of interest.
...
written by Bloix, April 19, 2011 12:53
"This morning NPR ran Eric Cantor saying the S&P action proved he was right, but did not run any Democrat saying it proved the Dems were right."

They also ran Joe Lieberman saying that it proved that Cantor was right.
Bloomberg
written by Union Member, April 19, 2011 1:31

How does Bloomberg rate in rating the Ratings Agencies?
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written by vibrams five fingers, April 20, 2011 3:48
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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