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First time in history, we get downgraded:

Standard & Poor's downgraded the U.S.'s AAA credit rating for the first time, slamming the nation's political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at "negative" as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based firm said yesterday.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement late yesterday after markets closed.

They downgraded even after the Treasury Department pointed out a $2 trillion error in their calculations:

The U.S. immediately lashed out at S&P after the downgrade, with a Treasury Department spokesman saying the firm's analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn’t elaborate, saying the mistake speaks for itself.

Paul Krugman basically nails it when he writes this reaction:

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it's hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point -- then went ahead with the downgrade.

More than that, everything I've heard about S&P's demands suggests that it's talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.

So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future -- but there's no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.

In short, S&P is just making stuff up -- and after the mortgage debacle, they really don't have that right.

So this is an outrage -- not because America is A-OK, but because these people are in no position to pass judgment.

And then links to this article from September 2008:

Rating Itself: S&P Defends Lehman's "A"

Standard & Poor's is taking great pains to defend its "A" rating for Lehman Holdings Inc.

The rating company fired off a report Wednesday asserting that the recent collapse of the investment banking firm was a case of negative market sentiment -- whether or not grounded in fundamentals -- creating significant difficulties that led the company to the point of failure.

"In our view, Lehman had a strong franchise across its core investment banking, trading, and investment management business," S&P stated. "It had adequate liquidity relative to reasonably severe and foreseeable temporary stresses."

The ratings service insisted that looking beyond the current downturn, the firm had good earnings-generating ability. "We believe the downfall of Lehman reflected escalating fears that led to a loss of confidence -- ultimately becoming a real threat to Lehman's viability in a way that fundamental credit analysis could not have anticipated with greater levels of certainty," said S&P credit analyst Scott Sprinzen.

On Sept. 9, with Lehman's share price dropping significantly, S&P noted that it placed the ratings on CreditWatch given that, even though it perceived Lehman to have certain fundamental strengths, market sentiments -- which seemed to be escalating to the point of panic -- would have the real-world effect of making it more difficult for Lehman to raise capital and to maintain competitive funding costs. "At that time, we believed a meaningful possibility remained that with the completion of contemplated actions, Lehman could both remain viable and achieve affirmation of the ratings," the firm said.

The real crux of this downgrade is political, though, as Kevin Drum points out:

S&P statement:

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

Translation: Argue over the budget all you want, but Republican games over the debt ceiling simply aren't compatible with being a AAA superpower. Then, after some pro forma jabs at everyone for being unwilling to cut a better deal, they really lay into the GOP:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

There are two issues to grapple with here: 1) The Republicans are at fault because they refuse to raise taxes & 2) These ratings agencies need to be phased out. The first will only be changed through pressure by citizens, but the second could be on it's way to fruition already.

Perhaps this downgrade will finally put into focus what a joke these ratings agencies are, potentially leading to their removal in this process of credit ratings. Why on earth do the three agencies (S&P, Fitch, & Moody's) even hold such sway over credit markets? They got the sub-prime debacle completely wrong, too, rating many mortgage-backed securities AAA when in fact they were filled with junk mortgages that should have been rated at the bottom of the ratings rung.

So far, it looks like they have all evaded liability for their credit crises rating fiasco, too, by claiming that it is their First Amendment right to free speech to issue these "opinions":

In the aftermath of the economic meltdown, the credit rating agencies have evaded liability as successfully as Superman dodges speeding bullets. Just a handful of surviving cases blame the credit rating agencies for conferring rosy ratings on mortgage-backed securities that turned out to be drek.

In courtroom after courtroom, the agencies and their lawyers have successfully argued that credit ratings are protected opinions under the First Amendment. Plaintiffs have tried to get around the agencies' First Amendment defense by asserting that Moody's, S&P, and Fitch were so involved in structuring mortgage-backed securities to receive AAA ratings that they were de facto underwriters, but courts aren't buying it. In May, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a class action that asserted the underwriter argument against the big credit rating agencies.

That's right, they get paid a large amount of money for their "opinions," and cannot be held liable if those "opinions" are dead wrong.

It definitely begs the question: why are we even paying attention anymore to these privately-run, profit-driven, companies?

Solving healthcare is not as impossible as S&P seems to think. While it will still take a lot of work and some compromise here is a model that proposes a solution: http://www.treatmentreport.com/blog/solving-medicare-through-compromise/

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