Business Obama and S&P Vie for Credibility; Credit Downgrade Shows Distrust of the Political System and

of the Ratings Agencies That Judge How Well It Works By Damian Paletta, Carol E. Lee and Jeannette Neumann 1,592 mots 8 aot 2011 The Wall Street Journal Online WSJO The Wall Street Journal - Print and Online CTGSMFS Anglais Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved. The Obama administration and ratings firm Standard & Poor's have embarked on a battle for credibility that could shape the ultimate impact of the U.S. debt downgradeas well as their own reputations. Within minutes of Friday's bombshell announcement, both sides launched public fusillades against the other, which continued through the weekend. White House aides say President Barack Obama views the decision as unjustified, contending that it was based on a flawed process, a message he intends to convey to Americans in coming days. Officials worked the phones and made numerous calls to a range of investors "to mitigate any short-term negative impact," a Treasury official said. They also issued a series of public statements aiming to undercut S&P's analysis, trumpeting a dramatic, last-minute, $2 trillion snafu in the firm's calculations. S&P officials, meanwhile, took to a rare Saturday conference call and the Sunday morning political talk shows to establish their bona fides, defending their analysis and saying that the prolonged and neardisastrous conclusion of the debt-ceiling talks called into question Washington's ability to function. The "debacle over the debt ceiling" was one of the factors that led to the downgrade, John Chambers, chairman of S&P's sovereign ratings team said in a conference call with reporters Saturday. The chaotic scene leading up the downgradeincluding six hours of tense phone calls and hastily rewritten press releaseswill likely only fuel the controversy. Neither side can easily claim the high ground. The downgrade laid bare a distrust of both the Washington political system and the independent firms tasked with standing in judgment of it. Ultimately, investors are likely to be responsible for deciding who has more credibility. For Washington, even though the world's appetite for Treasury debt is expected to remain robust, the downgrade buttresses growing worries about whether political leaders from both parties can adequately tackle their unsustainable debt loads. Many of the biggest debt concerns are fueled by rising health-care costs and an aging population, problems that will become only more acute in the next decade. S&P, which has been lashed for its miscalculations in assessing mortgage bonds before the financial crisis, finds itself in the lonely position of questioning the riskiness of U.S. debt when rival firms Moody's Investors Service and Fitch Ratings have stopped short. David Riley, head of Fitch's sovereign ratings team, said on Saturday that a downgrade by Fitch would be "premature" because the firm is waiting to see the outcome of the committee created by the debt-ceiling bill to hammer out further deficit-reduction measures. The battle ultimately boils down to these dual questions: Should U.S. Treasurys truly be considered the safest bet in the world, even after leaders have for years wasted opportunities to slow the growth of government debt? Or should S&P be trusted to second-guess the government's ability to pay its bills despite missing the mortgage mess and making a $2 trillion miscalculation in its decision to strip the U.S. of its top-notch triple-A status. "I think S&P has shown really terrible judgment and they've handled themselves very poorly," Treasury Secretary Timothy Geithner told CNBC Sunday. "And they've shown a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement." Mr. Geithner also said Sunday he would stay in the administration through the 2012 election, a message that could be meant to assure jittery markets that the administration's top economic-policy maker would Page 1 of 3 2011 Factiva, Inc. Tous droits rservs.

remain on board. Key to the dispute will be both sides' retelling of the critical few hours that led up to S&P's announcement. At around 2 p.m. Friday, four Treasury officials were huddled in the office of Mary Miller, assistant secretary for financial markets, studying a draft press release S&P officials had sent over explaining their rationale for downgrading the U.S.'s long-term debt. Rumors had swept the market all day that the downgrade is coming. Indeed it was, but the firm had made no public statement. These numbers look high, acting assistant secretary for economic policy John Bellows told Ms. Miller and others in the room, a person familiar with the matter said. He took the press release back to his office and compared it with other deficit projections, known as "baselines" that he had been studying after the Aug. 2 deal to raise the $14.29 trillion debt ceiling. Sure enough, Mr. Bellows confirmed, S&P had used an estimate of future deficits that projected U.S. debt to be roughly $2 trillion higher than many others expect by 2021. When he relayed this to his colleagues, they checked the numbers again to make sure they were right and then informed S&P officials. S&P officials were initially stunned, and said they wanted some time to check their assumptions. Time was running out. S&P indicated to the Treasury it wanted to make the downgrade public between 4:30 p.m. and 5 p.m. Treasury urged the officials to take more time, perhaps even delay any announcement until Monday while they rethought their decision. At 5:15 p.m., Treasury officials and their S&P counterparts spoke again. S&P conceded it had used the wrong assumptions when projecting future deficits. The mistake had essentially projected that government spending would grow more rapidly over the next 10 years than many project it actually will under current law. S&P said, however, that it stood by the decision to go forward with the downgrade. The Treasury team was shocked, and they launched into a number of increasingly blunt and pointed questions, a person familiar with the conversation said. Is $2 trillion a "material" number, Treasury officials asked? And if this is a change that is materially different than the initial vote, shouldn't the credit committee reconvene? The S&P team agreed to reconvene their ratings committee on a conference call, with members from North America and Europe dialing in. It again stood by the decision, though the firm rewrote its press release to emphasize not the financial projections, which had been the firm's first focus, but instead its concerns that U.S. political leaders wouldn't be able to make the changes needed to change the path of America's future debt load. Treasury officials were astonished, asking each other how such a monumental decisiondowngrading the U.S. debt for the first timecould be done in a way they felt was so haphazard. S&P officials call Treasury's reaction a predictable response of a country trying to shoot the messenger. The Treasury's pushback is "the same you would get from any other country or company," S&P President Deven Sharma said in an interview Saturday. "And our job is to tell the investor: This is where we think the risk is." White House officials are talking about the downgrade as a non-event generated by second-rate economists at a firm that contributed to the recession. Aides played down Mr. Obama's reaction to the news, saying it was a move the White House long expected. Mr. Obama was briefed about the downgrade Friday afternoon in the Oval Office by Mr. Geithner and National Economic Council Director Gene Sperling. The president then placed calls to German Chancellor Angela Merkel and French President Nicolas Sarkozy about the crisis in Europe, during which he mentioned the downgrade. The reactions of Mr. Sarkozy and Ms. Merkel couldn't be learned, neither could the tone of Mr. Obama's conversation. Around the time the Treasury discovered S&P's mistake, Mr. Obama flew to Camp David, where he was to spend the weekend with family and friends who had come into town for his 50th birthday. The president was informed of the budget mistake, and Messrs. Daley, Geithner and Sperling kept him updated Friday evening with phone calls and emails on the back-and-forth between Treasury officials and S&P's up to the final decision to go ahead with the downgrade. Page 2 of 3 2011 Factiva, Inc. Tous droits rservs.

What followed was a race for the two sides to discredit the each other. David Axelrod, one of Mr. Obama's chief political advisers, said the president will likely make the case in coming days that "the reliability of the United States debt is undiminished," but that leaders in Washington need to pursue a "balanced" approach to the long-term problem that includes tax increases on the wealthy, while also passing initiatives to generate economic growth in the short-term. Republicans generally oppose that approach, and instead put the emphasis on changes to the U.S. safety net. S&P plans a conference call Monday morning for investors to bolster the case for its downgrade, and also plan appearances on talk shows. Corrections & Amplifications An earlier version of this story mistakenly said Germany's chancellor is Andrea Merkel, instead of Angela Merkel. Write to Damian Paletta at damian.paletta@wsj.com and Jeannette Neumann at jeannette.neumann@w sj.com Document WSJO000020110808e7880001x

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