Watchdog reviews US credit rating cut

THE Securities and Exchange Commission is reviewing the method Standard & Poor's used to cut the US credit rating and whether the firm properly protected the confidential decision.

By InvestSMART · 15 Aug 2011

By InvestSMART ·
15 Aug 2011

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THE Securities and Exchange Commission is reviewing the method Standard & Poor's used to cut the US credit rating and whether the firm properly protected the confidential decision.

SEC inspectors are examining S&P's policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the US credit rating on August 5, said a source who did not want to be identified.

S&P's downgrade of the US for the first time triggered an equity rout that wiped about $US6.8 trillion ($A6.6 trillion) from the value of global stocks from July 26 to August 11.

US officials have said the downgrade was based on a flawed analysis that overstated debt by about $US2 trillion, while S&P said the discrepancy doesn't change projections that the US debt-to-gross domestic product ratio will probably continue to rise in the next decade.

The rating company lowered the nation's AAA grade to AA after warning on July 14 that it would reduce the ranking in the absence of a credible plan to decrease deficits even if the nation's $US14.3 trillion debt limit were lifted.

The decision was at odds with the other two main ratings companies, Moody's Investors Service and Fitch Ratings, which both said the US continued to deserve the top credit rating.

SEC staff are also looking into whether certain market participants learnt of the downgrade before its announcement.

The inquiry, which is in preliminary stages, may not result in a referral to the SEC's enforcement division. Ed Sweeney, an S&P spokesman, said the firm did not discuss specific interactions it had with regulators.

"S&P takes its confidential information and securities trading policies, and the related securities regulation, very seriously," Mr Sweeney said in a statement.

"Our policies prohibit analysts or rating committee members from trading and holding securities or options of the companies or governments they rate."

Mr Sweeney said the firm had "long-standing policies and procedures in place" to protect confidential information.

Mr Sweeney also said the firm had previously indicated in a July statement that there was a chance of a downgrade.

S&P "published several reports and broadly communicated our views regarding the potential impact on other fixed-income securities," the statement said.

The rating downgrade added to concern about prospects for the global economy as Europe's debt crisis deepened.

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Frequently Asked Questions about this Article…

What is the SEC reviewing about S&P's US credit rating downgrade?

The SEC is reviewing the method Standard & Poor's used to cut the US credit rating and whether S&P properly protected the confidential decision. Inspectors are examining S&P's policies for conducting such analyses, whether those procedures were followed for the August 5 downgrade, and whether some market participants learned of the downgrade before it was announced.

How did S&P's US credit rating downgrade affect global markets and investors?

S&P's downgrade triggered an equity rout that wiped about US$6.8 trillion (A$6.6 trillion) from the value of global stocks between July 26 and August 11, increasing market volatility and investor concerns about global economic prospects amid Europe's deepening debt crisis.

Why did S&P decide to lower the US credit rating from AAA to AA+?

S&P said it lowered the US from AAA to AA+ after warning on July 14 that it would reduce the ranking if there was no credible plan to decrease deficits, even if the US debt limit (about US$14.3 trillion) were lifted. S&P also cited projections that the US debt-to-GDP ratio will likely continue to rise over the next decade.

Did other credit rating agencies agree with S&P's decision to downgrade the US?

No. The article says the decision was at odds with the other two main rating companies—Moody's Investors Service and Fitch Ratings—both of which said the US continued to deserve the top AAA credit rating.

Have US officials raised concerns about S&P's analysis?

Yes. According to the article, US officials said S&P's downgrade was based on a flawed analysis that overstated US debt by about US$2 trillion, a discrepancy S&P says doesn't change its projections about rising debt-to-GDP over the next decade.

Is the SEC inquiry likely to lead to enforcement action against S&P?

The inquiry is in preliminary stages and SEC staff say it may not result in a referral to the SEC's enforcement division, so enforcement action is not certain based on the initial review.

Was there any suggestion that S&P employees traded on the downgrade before it was public?

SEC staff are looking into whether certain market participants learned of the downgrade before its announcement. S&P has said its policies prohibit analysts or rating committee members from trading or holding securities or options of the entities they rate, and that it has long-standing procedures to protect confidential information.

How did S&P respond publicly to questions about the downgrade and confidentiality?

S&P spokesman Ed Sweeney said the firm would not discuss specific regulator interactions, emphasized that S&P takes confidentiality and securities trading policies very seriously, noted its policies prohibit relevant staff from trading, and pointed out the firm had previously indicated in July there was a chance of a downgrade and had published reports on potential impacts to fixed-income securities.