When Standard & Poor’s downgraded U.S. credit, I wrote in these pages that it had done a disservice to the American economy and consumers. Far from providing a true barometer of the risk associated with U.S. debt, S&P was “paying back” for missing the most flagrant foul of the century: Providing Triple A ratings for sub-prime mortgage securities.
Fast forward four years to today and S&P misguided effort to get it “right” by downgrading US debt. S&P was alone and wrong to do so. Its sudden lurch to “overprotective, overcautious rating agency” was a cue followed by no one; yet it led to the worst single-day Dow Jones drop since 2008. (And trust me, with an election year nearly upon us, we haven’t heard the last of this historic downgrade.)
Now comes the SEC, with its whistle and a big yellow flag flying. “Penalty, S&P. Frivolous granting of a AAA rating to a basket of questionable mortgage backed securities issued in 2007. Fifteen yards and an automatic first down.”
Given the timing of the SEC action (on the heels of S&P’s decision to downgrade US debt) its motivation may be suspect, but the Commission is surely moving in the right direction. The Credit Rating Agencies must be subject to greater regulation. While the SEC is looking into S&P actions leading up to the financial crisis, they must continue to prosecute where they can and with rigor and purpose.
We can only hope this current probe into S&P will lead to a wider investigation, in which the entire structure and dependence on CRAs is evaluated. Major repair is needed in any system in which an agency is paid by the very company it is rating to issue an “unbiased opinion”. But first the SEC must add some bite to its bark by imposing real penalties on S&P’s. We’ll see.
Consider me among the skeptics.