Obama officials attack S&P's credibility after downgrade

Sat Aug 6, 2011 12:42am EDT

* S&P downgrades U.S. after government points out error

* Fed says action will not impact emergency bank lending

* Republican lawmaker calls for Geithner's resignation

By Glenn Somerville and Rachelle Younglai

WASHINGTON, Aug 5 (Reuters) - The Obama administration attacked the credibility of the analysis underlying Standard & Poor's decision to downgrade the United States' top credit rating on Friday, saying it had found a $2 trillion error.

S&P was forced to remove the number from its analysis after Treasury officials discovered that the rating agency's estimates of the government's discretionary spending was $2 trillion too high, sources familiar with the discussions said.

There was evident dismay, and some anger, within the Obama administration at S&P's decision to downgrade U.S. debt despite the errors officials said they had found in the calculations.

"A judgment flawed by a $2 trillion error speaks for itself," a Treasury spokesman said after S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits. For more on S&P decision, see [ID:nN1E774236]

The comment marked the first time the U.S. Treasury had publicly chastised S&P. Administration officials have privately grumbled that the rating agency's understanding of the U.S. political system was unsophisticated.

David Beers, the top S&P official behind the ratings decision, told Reuters in an interview that any change in the rating agency's calculations would have been taken into consideration before the decision was made public. [ID:nN1E77425C]

Sources familiar with talks that took place between S&P and the U.S. Treasury on Friday afternoon said the rating agency had wanted to see $4 trillion sliced from future budgets as part of a hard-fought deal secured earlier this week to lift the nation's debt limit. That agreement would reduce deficits by $2.1 trillion over 10 years.

Even after the error was pointed out, the rating agency declined to hold off on its downgrade, sources said.

With the threat of a downgrade looming, Treasury officials earlier in the week had played down the potential impact and said markets already were aware it was under consideration and that two other agencies were maintaining their triple-A rating.

The Federal Reserve effectively shrugged off the downgrade, saying it would not affect the operation of the central bank's emergency lending window or its buying and selling of Treasury securities to conduct monetary policy. The Fed can only extend emergency loans to banks against good collateral.

PLENTY OF FINGER POINTING

Treasury officials, who spoke on condition of anonymity, said on Wednesday that top bond dealers were questioning S&P's credibility, which took a heavy blow during the 2007-09 financial crisis when mortgage-related debt lost much of its value after originally being awarded high ratings. The reputations of two other big rating agencies, Fitch and Moody's, were also tarnished.

Ian Lyngen, a senior government bond strategist at CRT Capital Group in Connecticut, agreed S&P now had more than just a credibility problem.

"The fact that they have now downgraded the United States suggests to me that they are now going to be dealing with a relevance issue," he said. "Because the fact of the matter is that 10-year (Treasury note) yields are near 2.5 percent, and that in no way suggests a lack of sponsorship for U.S. debt."

Yields on U.S. 10-year notes US10YT=RR, a benchmark for borrowing rates throughout the economy, fell as far as 2.34 percent on Friday -- their lowest since October 2010 and very low by historical standards.

POLITICAL POINT SCORING

Lawmakers used the downgrade to square off over how best to rein in the nation's budget gap, with Democrats saying more revenue was needed and Republicans focusing on spending cuts.

S&P's action "reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures," said Senate Majority Leader Harry Reid, a Democrat from Nevada.

House of Representatives Speaker John Boehner, a Republican from Ohio, called the downgrade "the latest consequence of the out-of-control spending that has taken place in Washington for decades."

Sen. Jim DeMint, a leading conservative, went further, saying Treasury Secretary Timothy Geithner should resign.

The White House maintained silence, but Dan Pfeiffer, Obama's communications director, signaled the administration's strategy -- to put the blame on the Republicans -- when he added bits of media commentary to his Twitter.com feed, an increasingly common vehicle for transmitting the White House viewpoint.

One "retweet" he sent from a Washington Post columnist said, "This didn't happen because an earthquake wrecked our factories or a plague hit our workers. It was Congress. Particularly (Republicans)in Congress."

Another "retweet" from a Fox News reporter read: "Remember President Obama pushed for a 'Grand Bargain' that would have cut approximately $4 trillion in debt, but Speaker John Boehner walked."

A Republican-led congressional panel is probing whether the administration had tried to influence S&P before the rating agency revised its outlook on the U.S. debt rating to negative in April. (Additional reporting by Matt Spetalnick, Mark Felsenthal, David Lawder and Christopher Doering; Writing by Rachelle Younglai; Editing by Clive McKeef and Jan Paschal)

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Comments (9)
jopocop wrote:
I am outraged by S&P’s cowardly decision, sneaked in the night. They make my blood boil. How dare they attack the good credit of America, the country that won WW2, eliminated Hitler, saved the Jewish race, and defeated Stalinism and communism. America tore down the Berlin Wall. America compassionately rebuilt destroyed Europe and Japan. We saved Korea. We defended Israel. We have befriended the world as much as possible, giving our money and services and talents often for free. We have responded to natural disasters, famine, and refugees, i.e. the boat people from Vietnam. We have been a force for good in this world, promoting freedoms, human rights, and elimination of poverty.

America could have after WW2 returned to isolationism. We could have taken a pass on being the world reserve currency. We could have stuck with the gold standard. We could have passed on globalization. We could have protected our factories and busineses and jobs for Americans. We could have prevented outsourcing to foreign nations. We could have prevented Toyotas and Mercedes on our roads.

No, we did the opposite. We sacrificed many things for the world good. We let OPEC run the show on excessive energy charges to us. We were instrumental in stimulating world prosperity and improved standard of living.

So, how dare that corrupt and morally bankrupt S&P company critique America’s credit standing. America immediately could repay the entire national debt if the politicians so decided. America has great wealth and natural resources. There is more than just a GDP. America has great amounts of assets and property and market capitalization. Our economic activity is #1 in the world. A VAT tax if enacted tomorrow could pay off the debt in full.

S&P is out of their minds and way out of bounds to downgrade the richest country on the planet, that can easily repay the full debt.

America never defaulted on its debt. It paid its debts even with the interest used to be 15% per annum.

Some of our debt still comes from WW2 borrowings and post WW2 reconstruction of the free world, and S&P feels that we are owing too much? By the way, has S&P paid its fair share of taxes to the USA? Has S&P been benefited by the favorable tax treatment it has been given. Have they been forced to repatriate their foreign assets back to the USA so that we can gain taxes from them, with which to repay the national debt?

Where are the brains of S&P, in what they are thinking or saying, in being critical of the great USA that has on purpose done so many things for the benefit of the world.

How could they dare come up with a political complaint, rather than common sense that America could pay off the debt immediately if so determined by our democratically elected representatives. In fact, S&P should be applauding that this democratic country could find compromise based on competing economic theories over the levels of spending and taxing and borrowing found to be best for America and the world for that matter.

The bottom line, is that S&P should be subjected to protests, boycotts, demonstrations, by irate Americans and other world citizens for their flawed and arrogant decision tonight.

Aug 06, 2011 1:29am EDT  --  Report as abuse
pappawtom wrote:
As for me this downgrade is disastrous at the least. The government has been fiddling while the US is burning. It is past time for members of Congress to do what they are paid to do and that is protect us from this sort of thing happening in the first place but I guess we need to get rid of this bunch because they couldn’t take care of a marble without letting it roll away.

Aug 06, 2011 1:30am EDT  --  Report as abuse
pappawtom wrote:
As for me this downgrade is disastrous at the least. The government has been fiddling while the US is burning. It is past time for members of Congress to do what they are paid to do and that is protect us from this sort of thing happening in the first place but I guess we need to get rid of this bunch because they couldn’t take care of a marble without letting it roll away.

Aug 06, 2011 1:30am EDT  --  Report as abuse
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