From: NYPOST.com
Treasury Secretary Tim Geithner hit a new low this week in denouncing Standard & Poor's for downgrading its outlook on US government debt.
In dropping the outlook from "stable" to "negative," S&P on Monday said there's a one-in-three chance it will feel obliged to downgrade Treasury's coveted AAA credit rating within two years. The big question: Will President Obama and Congress reach agreement on dealing with the exploding national debt and out-of-control budget deficit?
This should have come as no surprise to anyone: The national debt has soared under Obama, from $10.7 trillion to nearly $14.3 trillion -- and Obama's "tax the rich" rhetoric suggests he's only focused on re-election, not on making a deal with Republicans in Congress that would require real spending cuts.
When it comes to advance notice of impending crises, S&P and the other two federally recognized credit-raters, Moody's and Fitch, have records about as good as the crow's nest lookout on the Titanic. They failed to spot the coming bursting of the Internet and housing bubbles and the Enron crisis.
That is, by the time they call it, it's usually too late.
Yet Geithner actually further reduced their credibility by attacking S&P. In interviews on Fox Business News, CNBC and Bloomberg TV, he said there is "no risk" of an actual downgrade and that S&P was "absolutely" wrong.
Problem is, the Dodd-Frank Financial Reform Act gives the government added power over the ratings agencies.
The law -- written and passed on Geithner's watch at Treasury -- places special emphasis on conflicts of interests: Half of the rating agencies' board members must be "independent" and agencies are warned not to allow themselves to be unduly influenced by the organizations they are rating.
A new Office of Credit Rating at the SEC, with its own compliance staff and authority to fine, oversees the agencies -- with the SEC itself having the power to "deregister" an agency for providing "bad" ratings.
There's still plenty of disagreement over what caused the housing bubble. But everyone agrees that the bubble wouldn't have grown so large so fast, and its bursting would have been far less painful -- if the credit rating agencies hadn't been giving upbeat ratings on mortgage debt (up until the bitter end) to Wall Street firms when they were securitizing the loans.
Now that the US stands in the same shoes in which the Wall Street firms stood back in the boom years, Treasury's head honcho is fine telling investors the credit rater is wrong and that everything is honky dory.
Execs at the rating agencies must be sweating this one out: Thanks to Dodd-Frank, the feds hold the power of life and death over them. If the SEC finds an agency made a "bad" rating, it can put it out of business.
And that's just what Tim Geithner said right after the S&P position was announced -- that it had made a bad call. Apparently, Geithner is perfectly capable of rating his employer all by himself.
So ask yourself: Was Geithner trying to shore up investor confidence, or trying to intimidate S&P -- or both?
S&P's competitor, Moody's, seems to have gotten the message: Back in January, it said it might need to place a "negative outlook" on US debt sooner than anticipated -- but on Monday it mysteriously reaffirmed its "stable" outlook.
Geithner's taking to the airwaves was planned carefully -- Treasury started setting up the interviews the evening before S&P announced its move publicly.
Yet it was ill-advised and sophomoric. If there's a sense the Obama administration is threatening to retaliate against the credit raters if they downgrade US debt, sovereign-wealth funds will stop relying on those ratings and use their own internal assessments, which could prove disastrous.
If the interest rate the US pays on the $14.3 trillion national debt were to climb 5 percent -- putting short-term Treasury rates about where they were in 2007 -- the added cost would equal our entire defense budget.
Let's face it: The biggest threat to the US economy today is the US government. And the US government is no doubt the largest "rated organization" in the world. Yet the feds have no concern that this rated organization might exert undue influence over the rating agencies.
Stephen B. Meister is a partner in Meis ter, Seelig and Fein, LLP.
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