GUEST COMMENTARY: U.S. still standing, pursuing S&P

2013-02-09T11:45:00Z GUEST COMMENTARY: U.S. still standing, pursuing S&PBy Arthur I. Cyr
February 09, 2013 11:45 am  • 

"I am shocked, shocked to find … gambling …" This famous line of the cynical Captain Renault to night club manager Rick in the film classic "Casablanca" comes to mind in reflecting on the practices of American credit rating agencies.

Standard & Poor’s, arguably the preeminent credit rating company, has been formally charged with large-scale fraud. On Feb. 5, Attorney General Eric Holder announced civil, not criminal, federal prosecution for $5 billion in damages for allegedly falsely inflating the value of mortgage-backed investments.

The Feds focus on the period March to October 2007, just before the failure of this market in the U.S. touched off the global financial collapse and severe recession. The indictment alleges warnings from the industry’s own analysts were ignored for at least three years.

Lead S&P attorney Floyd Abrams was primed and responded immediately that his client was being singled out. He argues other firms, and indeed the Treasury Department, were guilty of similar optimism.

This lawyer’s shock was not heard round the world, partly because the wrongdoing of others does not absolve S&P, partly because government agencies rightly have limited authority to intervene in free markets.

S&P has also been conducting preemptive maneuvers. In August 2011, the firm downgraded the standing of the United States from AAA. Meanwhile, global demand for U.S. government bonds increased even as the downgrade made international news.

Company officials declared the downgrade reflected high and growing deficit and debt levels of the U.S. government, and doubts about capacity and will to correct the situation. With moralistic solemnity, the credit crunchers announced this was the first time in history their firm has moved the U.S. down from AAA.

When a National Public Radio interviewer at the time asked a Standard and Poor’s representative about shocking lapses in private sector evaluation, the executive responded that was handled by another section of the company. In "Casablanca" vernacular, the S&P guy played dumb and passed the buck.

Which brings us to President Harry Truman, who displayed a sign on his desk in the Oval Office stating, "The Buck Stops Here." Truman and other Allied leaders of that time faced seemingly endless challenges, including the Cold War, which began soon after the unconditional surrenders of Germany and Japan, the Korean War and U.S. debt greater than today. New federal programs to aid the retired and unemployed, educate millions of returning veterans and regulate labor and management were uncertain regarding either effectiveness or expense.

Yet S&P did not downgrade the United States at that time.

Why not?

Because equating the U.S. national government, which commands vast actual and potential assets, with the balance sheets of even enormous commercial corporations is absurd.

In that turbulent earlier time, national unity was essential. A credit ratings company which downgraded our government would have rightly been ostracized.

S&P publications of that era reveal a Wall Street cheerleader, constantly exhorting people to buy stocks, described as undervalued. Yet people remained unconvinced. For years after the Great Depression, credit ratings firms were widely regarded as shills of discredited Wall Street. Despite economic revival, stock prices did not rise to levels predating the 1929 crash until 1955.

Financial services firms today resent re-regulation by Washington and strike back by appealing to general public cynicism regarding much of government, especially Congress.

The Justice Department is avoiding criminal charges. Ratings companies including S&P should seize this opportunity to reform their practices, immediately.

Arthur I. Cyr is Clausen Distinguished Professor at Carthage College in Wisconsin and author of "After the Cold War." He can be reached at The opinion expressed in this column is the writer's.

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