Even after Congress included rules in the Dodd-Frank Act last year designed to cut reliance on ratings, S&P and its competitors remain a key part of the financial markets. Pension and mutual funds often require minimum ratings to buy debt securities. Banks are generally required to hold less capital to back higher rated bonds as regulators including the Federal Reserve have yet to find an alternative.
The Justice Department is probing S&P and Moody's over mortgage-bond ratings between 2005 and 2008, according to three former analysts who said they were interviewed by investigators. The Senate Banking Committee and the Securities and Exchange Commission are scrutinizing the decision to downgrade the U.S. rating, according to people with knowledge of the inquiries.
Congress's Failure
S&P downgraded the U.S. even after Treasury Department officials told the firm it had overestimated future national debt by $2 trillion. The company said the mistake didn't affect its decision, which was based on Congress's failure to pass enough budget cuts during the standoff over the debt ceiling with President Barack Obama. S&P's move conflicted with Moody's and Fitch, which kept their top ratings on America's debt.
"The point is the debt is still rising," Sharma said in a Bloomberg Television interview on Aug. 9. "That's why the sovereigns team and ratings committee came to that conclusion."
S&P generally doesn't cap the rankings of companies or structured-finance securities at their country's level. Along with the 14,000 securitized bonds, four non-financial companies including Johnson & Johnson and Microsoft Corp. have AAA rankings, Bloomberg data shows.
'Decent Job'
Granting top grades to securitized debt can be appropriate as long as the AAA rated portion is small enough that the collateral is sure to be worth enough to pay it off even in extreme circumstances, said Ron D'Vari, the chief executive officer of the advisory and asset management firm NewOak Capital LLC in New York. He used the example of $100 of bonds backed by $500 million of car loans.
The U.S.'s lower grade may make sense when taking into account the government's "willingness to repay rather than ability," said D'Vari, a former head of structured finance at BlackRock Inc., which manages more than $1.14 trillion in fixed- income assets.
Pacific Investment Management Co., which runs the world's largest bond fund, says the quality of structured-finance ratings has improved since the run-up to the financial crisis.
"They are doing a decent job -- far better than the glory days," said Scott Simon, the head of mortgage- and asset-backed debt at Newport Beach, California-based Pimco, which runs the $245.5 billion Total Return Fund.