S&P deals with its own downgrade

Standard & Poor's headquarters in the financial district of New York on August 6, 2011.

Bob Moon: One of the credit-rating agencies that helped get B of A in trouble -- Standard and Poor's -- has found itself in some hot water of its own lately. First for being the only one of its peers to downgrade U.S. government bonds. And, it's become the target of a federal investigation into whether the ratings on toxic mortgage bonds were wildly inflated.

Today, S&P announced a new president will take over the firm in a few weeks. And while it denies any tie to the downgrade controversy or the investigation, S&P certainly has some credibility-building ahead in Washington. Here's our D.C. bureau chief, John Dimsdale.


John Dimsdale: Deven Sharma became president of S&P in late 2007 -- just as the company was downgrading the prime ratings it had given bonds backed by subprime mortgages.

Joshua Rosner: So, in times of loss of confidence, they seem to tilt towards changing management.

Joshua Rosner follows S&P for Graham Fisher investment research. He figures Sharma's replacement has a mandate to fix S&P's image.

Rosner: That was what Sharma was brought in to do, is to repair investor confidence, repair confidence in the beltway of Washington. And frankly, I think confidence in S&P is no better than it was in 2007 when he came in.

S&P downgraded Treasury bonds, even after the government accused the company of a $2 trillion accounting mistake. Its methodology was criticized by no less than the president and the treasury secretary.

Middlebury College economics professor Michael Schozer says S&P failed to convince Washington the downgrade was fair.

Michael Schozer: There should be a great deal of consistency between the way in which they rate the United States to the way they rate France; the way they rate Spain, other major countries.

The best way to shore up S&P's credibility is to disclose how it comes up with its grades, says Noel Hebert at Mitsubishi UFJ Securities.

Noel Hebert: At the end of the day, you've got to look to the leader of the organization to be responsible for high-level communications.

Hebert says the White House and Congress were caught by surprise by S&P's downgrade. He says the new president, Douglas Peterson, will have to make sure that doesn't happen again.

In Washington, I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...