'US still standing, and S&P will pay for crimes'

By Arthur I. Cyr

“I am shocked, shocked to find … gambling ….” This famous line of the cynical Captain Renault to night club manager Rick in the film classic “Casablanca” comes to mind in reflecting on the practices of American credit rating agencies.

Standard & Poor’s of McGraw Hill Financial is a preeminent credit rating company. On February 3, the company announced $1.38 billion will be paid to settle federal fraud charges regarding ratings of mortgage-backed investments.

The collapse of these securities began the global financial meltdown and recession. The agreement comes almost exactly two years after the U.S. Justice Department began the prosecution. Authorities focused on March to October 2007, just before the market failed. The indictment alleged warnings from the industry’s own analysts were ignored for at least three years.

When S&P was charged, primed company attorney Floyd Abrams responded immediately that his client was being singled out. He argued S&P was only guilty of optimism, along with other firms and indeed the U.S. Treasury.

This lawyer’s shock was not heard round the world. Alleged wrongdoing by others does not absolve S&P. Additionally, government agencies have limited authority to intervene in free markets.

Simultaneously, S&P was aggressively conducting pre-emptive maneuvers. In August 2011, the firm downgraded the standing of the United States from AAA. Meanwhile, global demand for U.S. government bonds increased even as the downgrade made international news.

Company officials declared the downgrade reflected high and growing deficit and debt levels of the U.S. government, and doubts about capacity and will to correct the situation. With moralistic solemnity, the credit crunchers announced this was the first time in history their firm had moved the U.S. down from AAA.

When a National Public Radio interviewer at the time asked an S&P representative about shocking lapses in private sector evaluation, the executive responded that was handled by another section of the company. In “Casablanca” vernacular, the S&P guy played dumb and passed the buck.

Which brings us to President Harry Truman, who displayed a sign on his desk in the Oval Office stating “The Buck Stops Here.” Truman and other Allied leaders of that time faced seemingly endless challenges, including World War II, the Cold War which began soon after defeat of the Axis, the Korean War, and U.S. debt greater than today. New federal programs to aid the retired and unemployed, educate millions of returning veterans, and regulate labor and management were uncertain regarding either effectiveness or expense.

Yet S&P did not downgrade the United States at that time.

Why not?

Because equating the U.S. national government, which commands vast actual and potential assets, with the balance sheets of even enormous commercial corporations is absurd.

In that turbulent earlier time, national unity was essential. A credit ratings company which downgraded our government would have rightly been ostracized.

S&P publications of that era reveal a Wall Street cheerleader, constantly exhorting people to buy stocks, described as undervalued. Yet people remained unconvinced. For years after the Great Depression, credit ratings firms were widely regarded as shills of discredited Wall Street. Despite economic revival, stock prices did not rise to levels predating the 1929 crash until 1954.

Financial services firms today resent re-regulation by Washington and strike back by appealing to general public cynicism regarding government.

The Justice Department declined to bring criminal charges. Fortunate ratings companies including S&P should gratefully, honestly evaluate their practices and pursue self-reform, immediately.

Arthur I. Cyr is Clausen Distinguished Professor at Carthage College and author of ‘After the Cold War.’ Contact him at acyr@carthage.edu.