March 2, 2021

Anger Over Credit Rating Resurfaces in Washington

The frustration in the air was palpable. Officials from the credit ratings agency Standard Poor’s were meeting with Congressional leaders on a stifling late day in late July to discuss the thorniest issue in Washington: the effort to cut the nation’s deficit and raise the borrowing limit to avert a default.

S. P. and two financial industry groups listened to various proposals for debt reduction and warned the lawmakers of the impact a default would have on world markets, according to a Congressional staff member in attendance. The staff member said the agency was providing guidance on what target to hit in budget savings, but lawmakers struggled to understand the agency’s views.  

Since that meeting, several lawmakers have publicly questioned whether the ratings agencies have the competence to evaluate the country’s finances, and whether it was appropriate for them to be so deeply involved in discussions of fiscal politics. The criticism reached a fevered pitch after S. P. announced Friday night that it was downgrading America’s credit rating, a decision that thrust the ratings agencies to the center of the debate over the government’s budget, and prompted renewed scrutiny of an industry that has been harshly criticized since the financial crisis.

The ratings agencies’ purview is traditionally viewed as evaluating data and revenue projections for debt issuers, but they have long taken governance into account for ratings of sovereign nations and corporations. In its announcement Friday night, S. P. cited the political gridlock in Washington during the debt limit debate as a main reason for its decision. “The gulf between the political parties,” S. P. said, had reduced its confidence in the government’s ability to manage its finances.

In an interview Saturday, David Beers, the global head of sovereign ratings for the agency, said “we have to look at the process under which government policy is made.”

But some politicians questioned whether governance issues should play such a large role in the country’s debt rating.

Randy Neugebauer, a Texas Republican who heads the House Financial Services’ Subcommittee on Oversight and Investigations, said it was appropriate for S. P. to consider the political situation in its analysis. But he said that it was speculative for the agency to use predictions of what Congress would do in the future as a rationale for a downgrade.

“One thing that puts them out in uncharted waters is trying to predict what the political environment is going to be,” Mr. Neugebauer said in an interview.  “They’re not predicting an overly cooperative environment in Congress and that’s a very subjective call.” 

The tension between Congress and the ratings agencies could have tangible results on the companies’ futures if it speeds up new rules that lessen their roles in the market. As part of the financial reform bill passed last summer, regulators are supposed to write rules designed to reduce the heavy reliance on credit ratings by banks and other buyers of debt securities, a policy that has its roots in the 1930s.

Federal bank regulators have not yet created these rules and a Congressional committee held a hearing on July 27 on the slow pace of regulators’ implementation of this part of the law. Fierce debate broke out at the hearing about whether it was appropriate for the ratings agencies — companies regulated by the federal government — to be rating United States debt at all.

The pushback against S. P. echoes the complaints of other governments that have had their debt downgraded and responded with cries of unfairness.

Much of the enmity dates to the financial crisis. All three ratings agencies failed to see the credit crisis coming, and for years they bestowed AAA ratings on bundles of mortgage bonds, even though many of the loans inside those securities were highly questionable. Scores of investors purchased the securities based on the positive ratings; when the mortgages inside those deals went south, investors lost billions of dollars, kicking off the panic that drove the financial crisis.

Nelson Schwartz contributed reporting.

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