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White House Vs. S&P: The Fight For Credibility

Staff Reporters |
August 8, 2011 | 9:49 a.m. PDT

The White House and Wall Street appear to be in damage-control mode. As expected, markets were down Monday morning, following the news late Friday that rating agency Standard & Poor’s had downgraded U.S. debt for the first time in history from AAA to AA-plus. The White House and Standard & Poor’s are both fighting for credibility in the aftermath. S&P, especially, is taking flak for the downgrade as well as reinvigorated heat for its role in the 2008 financial meltdown. 

President Barack Obama on Monday afternoon affirmed his faith in the U.S.'s ability to pay its debt. We don't need a rating agency to tell us we need a balanced, fair approach to deficit reduction, he told reporters. He said the recent debt deal to cut $2.3 trillion in spending over the next decade was only the beginning. He reiterated his calls for tax reform and "modest adjustments" to programs like Medicare.

"No matter what some agency may say, we have always been and always will be a AAA country," he said. 

Worries over the U.S. credit rating are only adding to last week's stock selloff in reaction to the conclusion of the U.S. debt talks, the widening European debt crisis, a disappointing GDP report and less-than-encouraging job numbers, among others things. 

President Barack Obama in debt-ceiling talks (White House photo)
President Barack Obama in debt-ceiling talks (White House photo)

According to S&P, the U.S. government’s creditworthiness suffered because of the political wrangling over the debate over whether to raise the debt ceiling, the statutory limit on government borrowing. The S&P downgrade reflected fears that the U.S. political process has rendered it unable to slow the growth of its debt.

S&P, on the other hand, did not help its situation when it made a $2 trillion error in its downgrade decision, which was pointed out in two hours by the Treasury. Treasury Secretary Timothy Geithner over the weekend accused the rating agency of making the wrong choice. “S&P has shown really terrible judgment and they’ve handled themselves very poorly,” he told CNBC.

“Neither side can easily claim the high ground,” the Wall Street Journal reports, arguing that the debate will likely focus on the tense six hours leading up to the downgrade. The events are reported in some detail here.

Since the downgrade, commentators have ripped the agency for its lack of credibility and accountability in the financial meltdown that caused the latest recession. It wrongly gave high ratings to subprime mortgage backed securities and famously rated Lehman Brothers AAA until it collapsed.

Terry Keenan wrote in the New York Post that the downgrade is the “financial equivalent of tot mom Casey Anthony giving a Learning Annex seminar on parenting.”

Others accuse S&P of doing the work of the Tea Party deficit hawks. Investors such as Warren Buffett have defended the ability of the U.S. to meet its financial obligations.

Wall Street banks have also come out to say that the effects of the downgrade are likely to be turbulent over the next couple weeks, but unlikely to make a big difference in the long run.

The Wall Street Journal editorial page, however, argues that S&P's critics are in denial of the U.S. fiscal situation.

Morgan Stanley, on the other hand, runs down the possibly effects in its 10-Q, which the Financial Times describes as “worst-case” scenarios:

In particular, it could disrupt payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets, commodities markets and equity markets and adversely affect the cost and availability of funding and certain impacts, such as increased spreads in money market and other short term rates, have been experienced already as the market anticipated the downgrade.

In addition, it could adversely affect our credit ratings, as well as those of our clients and/or counterparties and could require us to post additional collateral on loans collateralized by U.S. Treasury securities. Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent.

The continuing volatility has led some economist to try to tell people to stop panicking. Economists are worried less about the U.S. credit outlook and more about the possibility of another recession.  

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