A Tit for a Tat?

You've probably heard or read that S&P downgraded U.S. debt from AAA to AA+.  AAA supposedly means the obligor has "extremely strong" capacity to meet its financial commitments, while AA+ means the obligor has "very strong" capacity to meet its financial commitments, differing from AAA only a tad.  I understand that earlier this year, four companies were rated AAA:  Exxon/Mobil (XOM), Automatic Data Processing (ADP), Johnson & Johnson (JNJ) and Microsoft (MSFT).  For more on S&P ratings, see http://www2.standardandpoors.com/spf/pdf/fixedincome/Ratings_Definitions.pdf.

To add a little perspective, I understand that yesterday S&P rated Ireland's debt as investment grade (AAA, AA, A or BBB), giving it a BBB+, a few notches above junk. Meanwhile, Moody's rates Ireland as junk -- Ba1.  S&P rates Greece as CCC -- very bad junk indeed.

But what exactly is S&P saying about the U.S.? The U.S., unlike Exxon or Microsoft, can print dollars to repay its debt. Does S&P think the U.S. Mint is about to explode?

"It sounds like a case of the pot calling the kettle black," says Virginia.

She's right. If I'm not mistaken, S&P was one of the credit rating agencies that rated subprime mortgage-backed securities as investment grade -- and remember what happened just three years ago! Some people place some of the blame for our current financial crisis on agencies such as S&P. Presumably the credit rating agencies have changed their practices since then.

Or maybe it's all politics. I don't know about you, but I'm finding it pretty hard to distinguish fact from fiction, honesty from dishonesty. If S&P were a child, I might suggest its latest downgrade is a little tantrum, thrown at the government that, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, included a subtitle aimed at credit rating agencies, now called "nationally recognized statistical rating organizations" (NRSROs). That subtitle -- Subtitle C of Title IX (Title IX being the Investor Protection and Securities Reform Act of 2010) -- comes down very hard on the credit rating agencies that granted inaccurate or misleading AAA ratings to securities backed by subprime mortgage loans. Among other things, it empowers the SEC to regulate NRSROs and requires all government agencies to reduce reliance on credit ratings by removing references to credit rating agencies and NRSROs from their regulations.

"Slap me, I'll slap you back," says Virginia.