"The old fashioned ratings agencies where humans make the decision to downgrade are always wrong," Christopher Whalen, managing director at Institutional Risk Analytics, said yesterday in a telephone interview.
S&P, Moody's and Fitch came under scrutiny for ratings of financial products linked to subprime mortgages after losses and writedowns by the world's biggest financial institutions reached $2.1 trillion.
The Financial Crisis Inquiry Commission called S&P and Moody's "key enablers of the financial meltdown" in its January report. In April, a Senate panel said that the rating companies engaged in a "race to the bottom" to assign top grades on mortgage-backed securities in order to win fees from banks.
'Last People'
S&P kept an A- rating on Iceland until October 6, 2008, when the country's government was forced to guarantee all domestic bank deposits after its currency plunged. The company reaffirmed its AAA rating for Lehman Brothers Holdings Inc.'s financial products unit on Sept. 12, 2008, three days before the bank failed. It downgraded Bear Stearns Cos. to BBB on March 14, 2008, two days before JPMorgan agreed to buy the failing securities firm.
"There is no reason to take Friday's downgrade of America seriously," Nobel Laureate Paul Krugman said in a New York Times column. "These are the last people whose judgment we should trust."
While S&P cut Japan's credit rating to AA- in 2002, the country has no difficulty borrowing. Japan's 10-year notes yield 1 percent, compared with 2.41 percent for AAA rated German bunds, Bloomberg data show.
"In those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong," Krugman wrote.
'Key Factors'
S&P said in its report that the failure by politicians to act on increasing government revenue also was a consideration in its decision. It no longer assumes that the 2001 and 2003 Bush tax cuts would expire by the end of 2012 "because the majority of Republicans in Congress continue to resist any measure that would raise revenues."