* 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 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
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
"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
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.
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
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
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
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
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)