Standard & Poor's - Criticism

Criticism

See also: Credit rating agency#Criticism and United States public debt

CRAs such as S&P have been subject to criticism in the wake of large losses beginning in 2007 in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the CRAs.

Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of loans. Investors trusting the low-risk profile that AAA implies, purchased large amounts of CDOs that later became unsaleable. Those that could be sold often took staggering losses. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by S&P.

Companies pay S&P to rate their debt issues. As a result, some critics have contended that S&P is beholden to these issuers and that its ratings are not as objective as they ought to be and that, in fact, this "pay to play" model makes their ratings meaningless at best and perhaps would more accurately be compared to the role of the "shill" in a game of three card monte.

In April 2009, the company called for "new faces" in the Irish government, which was seen as interfering in the democratic process. In a subsequent statement they said they were "misunderstood".

Some critics have pointed out that the company and other rating agencies were part of the cause of the global financial crisis of 2008–2009, for example when Moody's downgraded Freddie Mac or, to quote Time, when "both agencies granted AAA rating to Collateralized Debt Obligations (CDOs) that were chock-full-of crap mortgages, thereby helping to precipitate the 2008 financial collapse"). Ezra Klein wrote for The Washington Post that "Standard Poor's didn't just miss the bubble. They helped cause it," but he said S&P took the right action to downgrade the U.S. On the other hand, Paul Krugman wrote, "it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies," and, "S&P’s demands suggest that it’s talking nonsense about the US fiscal situation". Perhaps more revealing and supportive of Paul Krugman's comment, David Wyss, who was chief economist at S&P till July 2011 noted to a reporter on August 17, 2011: "The credit agencies don't know any more about government budgets than the guy in the street who is reading the newspaper." Such insider comments lay fresh doubts about the key ratings decisions by S&P. And, in a recent Wall Street Journal article, Mark Adelson, S&P's chief credit officer since June 2008, openly decried the quality of S&P analysis and analysts; yet the majority of them (including Clifford Griep, the former chief credit risk officer) remain employed by S&P. While Mark Adelson reviewed and edited the U.S. downgrade notice, he did not really question the reasoning, nor spot the $2 trillion error in the computations. Furthermore, on August 6, 2011, the CEO Deven Sharma publicly stated that he had no prior knowledge that such a rating change was even in the works for the prior day, but quickly went on to defend the move; in a surprise development, Deven Sharma left S&P in early September amid mounting criticism of the firm's ratings and research.

With the US downgrade some have accused S&P of causing further damage for its own agenda. S&P acknowledged making a US$2 trillion error in its justification for downgrading the US credit rating, but stated that it "had no impact on the rating decision". "A judgment flawed by a $2 trillion error speaks for itself," said a spokesman for the United States Department of the Treasury. Jonathan Portes, director of NIESR, Britain's longest established independent economic research institute, has observed that "S&P's record . . . is remarkable. The agency downgraded Japan's credit rating in 2002, since when it has had the lowest long-term interest rates in recorded economic history. That did not, however, stop S&P rating numerous sub-prime mortgage-backed securities as AAA, or maintaining its rating on Lehman Brothers until the bitter end."

The SEC is investigating whether the intent to downgrade the U.S. was leaked prior to the public announcement, since the stock market fell sharply for no apparent reason a day earlier, fed by rumors of an impending downgrade. Another issue that has concerned commentators is that an S&P rating — for example, of the US government or any other national government — can have, and has had, a distinct effect on a truly global scale, but the decision on these ratings are made by the company's employees who are not elected by the public, and are not accountable for their decision making process. There is no appeals process against a credit-rating decision.

In August 2011, S&P filed a letter with the SEC in an attempt to water down a proposal requiring credit rating agencies to publicly disclose "significant errors" in how they calculate their ratings. The SEC proposal, issued in May 2011, would require credit raters to disclose more about their methods and strengthen internal controls to protect against conflicts of interest.