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There are three main credit ratings agencies who set the credit ratings for banks and governments around the world. They have always rated the US government as triple A (or AAA), the highest possible. Yet those same CRA’s came under fire during the financial crisis of 2008, because they had said nothing during the runup to the crisis, and it became apparent that they were not doing their job properly.
Stung by these allegations, on August 5, 2011 Standard and Poor’s (S&P) downgraded the US government to AA+ for the first time in history. A smaller company, Egan-Jones, followed their lead. This was followed by threats and retaliation from the government. Here are some quotes from The Wikipedia.
Several credit rating agencies around the world have downgraded their credit ratings of the U.S. federal government, including Standard & Poor's (S&P) which reduced the country's rating from AAA (outstanding) to AA+ (excellent) on August 5, 2011.
The 2011 S&P downgrade was the first time the US federal government was given a rating below AAA. S&P had announced a negative outlook on the AAA rating in April 2011. The downgrade to AA+ occurred four days after the 112th United States Congress voted to raise the debt ceiling of the federal government by means of the Budget Control Act of 2011 on August 2, 2011.
Later, the US Government commenced an investigation into S&P's role in the rating of several mortgage-backed securities which played a role in the 2008 financial crisis.[1]
The S&P did indeed fail to do its job, yet it was the only one that learned its lesson and tried to rectify the situation in 2011. For their trouble, “the US Government commenced and investigation” to bully them into submission.
In order to mend its relationship with the US government, S&P asked its then-CEO to step down, a mere 18 days after the US was downgraded. S&P announced on August 23, 2011, that Deven Sharma would step down as a Chief of Standard & Poor's effective September 12, 2011, and would leave the company by end of the year…
Almost immediately after S&P announced the downgrade, first reported after 8 p.m.[27] on a Friday night, Obama administration officials began to publicly criticize S&P's decision.[3]
Republican strategists blamed Democratic intransigence for the rating agency's decision, and many Republican presidential candidates blamed the actions of Obama:[6]
Democratic politicians placed the blame for the downgrade on Republicans or elements of the Republican Party. Senator John Kerry referred to this as the "Tea Party downgrade", blaming Republican intransigence regarding revenues and disregard for the consequences of a default.[4]
Filmmaker Michael Moore demanded Obama "show some guts" and have the head of Standard & Poor's arrested.[7][8][9][10]
Although none of the Big Three took any downgrade action in 2012, Egan-Jones downgraded twice further. After its initial rating cut on July 16, 2011, from AAA to AA+, Egan-Jones cut its rating a second time on April 5, 2012, from AA+ to AA "because of the lack of any tangible progress on addressing the problems and the continued rise in debt to GDP."[31] On September 14, 2012, Egan-Jones cut its rating a third time from AA to AA-, the lowest of what is considered "high grade", as a reaction to QE3.[32]
Two weeks after the second downgrade by Egan-Jones in April 2012 to AA, the SEC voted to bring administrative action against the firm regarding years-old activity. Mr. Egan said at the time, "We are not going to be intimidated by anybody from issuing timely, accurate ratings."[42] After Egan-Jones agreed to a settlement in 2013, the SEC director Robert Khuzami said in a press release, "EJR and Egan's misrepresentation of the firm's actual experience rating issuers of asset-backed and government securities is a serious violation that undercuts the integrity of the SEC's NRSRO registration process."[43]
In response, a Fox Business Network editor raised the question of "government retaliation" and an Egan-Jones spokesman issued a non-apology apology stating that the "SEC settlement lets us focus on what we do best—producing the most accurate and independent ratings in the business."[44]
Two years later in 2013, S&P "blasted a $5 billion fraud lawsuit by the U.S. government as retaliation for its 2011 decision to strip the country of its AAA credit rating."[41]
On August 1, 2023 Fitch downgraded USA long-term credit rating to AA+ from AAA.[39]
It will be interesting to see if the US government is able to retaliate against Fitch as it did against S&P and Egan-Jones. The government’s position is that it cannot default because the Fed can always print up more money to pay off the bondholders. But that is precisely the problem. Printing more money and issuing more debt is not the solution but is certainly the problem. The government’s debt-to GDP surely has something to do with their credit rating.
So let us see if Moodys, the third big CRA, has the courage to join S&P and Fitch and to fight government retaliation.
Dr. Stephen Jones has been writing blog posts since 2005 on a variety of topics from Bible Studies to World News, and he has been writing books since 1992. Dr. Jones' most important writings came after God brought him back into the full-time ministry in 1991. It is here that all his earlier years of searching the Scriptures began to come into clear focus. He combines a knowledge of the Old and New Testaments with a personal revelation of God that began and developed during the "wilderness" period of his life, which he often refers to as God's True Bible College... Read More
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