Economic Paranoia: Did S&P Downgrade U.S. As a Preemptive PR Move?
When rating agency Standard & Poor's reduced the U.S. sovereign debt rating, it readied the scene for the stock market turbulence that followed. And yet, it did so while apparently aware of a $2 trillion mistake it made in the calculations on which it purportedly based its decision, switching the rationale to a political, rather than financial, one.
Now, the Department of Justice is investigating S&P for its ratings of mortgage-backed securities. Is this retaliation? No. If anything, the evidence and some general business paranoia suggests that S&P's downgrade could have been a preemptive strike in an upcoming PR and legal battle.
Out on a limb
Was S&P's downgrade reasonable? Here's some evidence that it might not have been, and that S&P could have had ulterior motivations. The Treasury Department pointed out a $2 trillion mistake in S&P's calculations hours before the rating coming made a downgrade official. Even so, the company went ahead, changing its rationale from an economic one to a political one.
Both Moody's Investors Service and Fitch Ratings, S&P's competitors, said that downgrades could be possible in the future but affirmed their top credit ratings for the U.S. The ratings services do disagree at times, but this is a fairly significant and critical difference, not a slight variation.
Vivisect la difference
Perhaps S&P really did feel that a downgrade was the proper action. If so, though, there shouldn't have been a switch in the rationale. If the original premise that was fundamental to the decision was wrong, then S&P should have logically reconsidered its position.
Perhaps the decision to downgrade was related to what a recent study found: sell-side analysts often dig in their heels on opinions when evidence suggests that they've taken a singularly strong and incorrect position. But that happens when the analysts publicly announce their opinions. S&P hadn't yet done so when it got word of the mistakes.
A prudent company looking to save face might have taken the opportunity to reconsider its position and then fired someone for gross negligence of care. Here's where the speculation kicks in.
Building their strategy
Although a DOJ investigation might seem like retaliation, it isn't. According to Bloomberg, Moody's also faces investigation, and that firm had maintained its rating on U.S. debt. If the U.S. had wanted to whitewash vengeance, then it would have probably leaked that it would target Fitch as well, to make the action look even-handed.
Why else, then, might S&P have downgraded the U.S.? There has been extensive criticism of the rating agencies over how they treated the highly questionable mortgage securitizations based on junk loans. The company knew of the probe before the downgrade, and clearly it would be bad for its reputation and business.
So why not take offensive action? By downgrading the U.S., S&P could call into question the legitimacy of any investigation in a preemptive PR move. In fact, in keeping with the theme, you have to wonder whether the firm's downgrade of 14 cities, states, and counties might have been a way to pretend that it was nothing personal.
Related:
- 6 U.S. Downgrade Dangers for High Tech
- At a glance: The US credit downgrade
- S&P Downgrade: Does it Matter?
- U.S. Credit Downgrade: Don't Sweat the Small Stuff
- Top 6 Ways a U.S. Credit Rating Downgrade Could Cost Americans
- S&P Downgrade: The Real Risk Is in Europe, Not the U.S.
Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
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