Still, “fundamental reform of the credit-ratings agencies was an area where Dodd-Frank fell short,” said Aaron Klein, a former Senate and Treasury Department staff member involved in the drafting and implementation of the law. Klein, now director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center, said he hoped the lawsuit would force lawmakers and regulators to take a fresh look the industry model.
While the SEC was working worked to carry out the changes, aimed at reducing reliance on credit ratings, political gridlock gripped Washington.
Government debt reached $14 trillion and Republicans were trying to force the administration to cut spending. That’s when S&P reached its Aug. 5, 2011, decision to downgrade the U.S. for the first time in the nation’s history.
Math Disputed
The administration disputed S&P’s rationale -- and its math -- when it downgraded the U.S. Treasury credit rating. The administration showed S&P that its 10-year estimate of the U.S. deficit was $2 trillion higher than the nonpartisan Congressional Budget Office. The company revised its figures and still stuck with the reduction from AAA to AA+.
The downgrade proved meaningless in the markets, which still consider the U.S. the safest of bets even as the political gridlock in Washington persists. Yields on 10-year Treasury notes fell to 1.72 percent on Sept. 22, 2011, from 2.56 percent the day of the downgrade. Borrowing costs remain below pre- downgrade levels, at 1.97 percent yesterday.
S&P gave the Treasury a credit rating lower than it had given some of the mortgage-backed securities and collateralized debt obligations that collapsed in 2007 and 2008. The language the administration used to describe S&P’s performance then isn’t much different from how officials now describe the lawsuit.
‘Fundamental Questions’
John Bellows, an acting assistant Treasury secretary for economic policy, said in a blog post the decision to downgrade the U.S. even after being shown errors in its analysis raised “fundamental questions about the credibility and integrity of S&P’s ratings actions.”
The company, as it stood by its decision, said the reaction from Treasury and the White House was typical of a country that had just seen their sovereign credit cut.