Sunday, August 7, 2011

A Brief Commentary on the U.S. Rating Downgrade

S&P downgrading the U.S. “credit” was a publicity stunt by the company for the company. The stunt had its share of bit players and company politics, but it took place within, and was ultimately driven by, a larger narrative that is slow growth in the U.S. and the finance-capital driven mandate of slashing public spending. Let us take them one by one.

One bit player was John Chambers of S&P, with the transparently fraudulent title of head of the company’s “sovereign rating committee”. He no doubt sees no absurdity in rating countries; his job title discourages coherent thinking, which is why he says drivel like this in a news conference:
“The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S.& P.’s sovereign ratings committee [by way of defending the downgrade].
Never mind that a debacle, by definition, cannot continue. But suppose it could and did. What of it? Was it at that last hour that the Chairman of S&P’s Sovereign Rating Committee realized there was a gridlock in Washington?

In truth, the “debacle” was an excuse as minds were already made up. Observe:
Officials at the White House and Treasury criticized S.& P.’s move as based on faulty budget accounting that did not factor in the just-enacted deal for increasing the debt limit.

In its analysis, S.& P. had projected the nation’s debt as a share of gross domestic product to reach 93 percent by 2021. That was around 8 percentage points higher than the figure administration officials believed the rating agency should have used — what they now call a $2.1 trillion error.

Gene Sperling, the director of the White House national economic council, called the difference, totaling over $2 trillion, “breathtaking” and said that “the amateurism it displayed” suggested “an institution starting with a conclusion and shaping any arguments to fit it.”

Around 5:30 p.m. [the day the downgrade was announced), S.& P. officials called the group of Treasury officials. “You were right,” Mr. Chambers told them, but said he was prepared to proceed because the revisions didn’t meaningfully affect S.& P.’s conclusion.
So the boys at S&P miss more than $2 trillion. The error is pointed out to them, but they still go ahead with the downgrade.

Why? Why such resoluteness to do something so controversial, especially when the other two big raters, Moody’s and the historically more strict Fitch, did not agree?

Enter another bit player, one Barry Rosenstein, a hedgie by day and human rights fighter by night.

He and other “activist investors” have accumulated large blocks of shares in McGraw Hill, the parent company of S&P. The plan is to break up the company, sell the valuable parts for profit and discard the rest.

When that time comes, the image of S&P as an independent and objective rating agency that took on the U.S. government could boost its value – or so the thinking must have been inside the company. Hence, the downgrade stunt.

Beyond the narrow company politics is the larger narrative of the downgrade as an instrument of coercion to force the government to cut their spending. In the upcoming Part III of the EU crisis, I examine this coercion mechanism in some length. It has implications that go far beyond the bit and two-bit players in the corporate, hedge fund and the takeover world.