On Friday night, when news broke that S&P had made a $2 trillion error in its analysis of the US debt situation, we kind of didn’t believe it.
Basically we figured there might have been some issue, but that mostly the Treasury was trying to throw up a smokescreen to distract from the bad news.
But this WSJ tick-tock on the interactions between the ratings agency and Treasury over the last week really is kind of unbelievable.
On Wednesday, S&P met with officials and said that it would soon make its decision.
On Thursday, S&P said that it would make its decision on Friday (note that the market got crushed on Thursday… did it leak?).
On Friday afternoon, S&P gave the Treasury the bad news, that it was downgrading the US.
Then later that afternoon, Treasury discovered the $2 trillion mistake (S&P initially used the wrong baseline, as explained here), and demanded S&P re-consider.
S&P was stunned, and called the CBO which confirmed the error. Then on Friday evening, they held another meeting, and re-wrote the press release to focus more on politics, delivering the downgrade with a re-cast rationale.
Now look, you can make a good defence of the re-cast rationale. The debt ceiling mess, the political gridlock, and the talk of default are/were real. S&P is right to see these as real issues, but if you’re going to make the most controversial ratings call on the world’s biggest debt issue by far, and if you’re part of a government-sponsored cartel whose sole job is to rate this stuff, the idea of going back and changing your work to get the same desired outcome after you make an error is an egregiously bad decision.
Governments always fight back against ratings agencies. Shooting the messenger is a time-honored tradition. We get that.
But while the downgrade was always going to invite retaliation, the inevitable Congressional hearings on the future of ratings agencies might actually be interesting.
PS: Another point to think about: While it’s remarkable that S&P just went back and changed its press release after discovering the error, the error itself is what’s really astounding. For a company whose sole job is to rate credit, not understand how budgets are scored by the CBO is astounding.
For more on the CBO and baselines and scoring budgets, see Krugman.