Business

Obama and S&P Vie for CredibiIity; Credit Downgrade Shows Distrust of the PoIiticaI System and
of the Ratings Agencies That Judge How WeII 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, lnc. 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 bombsheII announcement, both sides Iaunched pubIic fusiIIades
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 near-
disastrous 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
lnvestors 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.
"l 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 l 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
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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. lndeed 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.
ls $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. lt 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.
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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
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S&P 'Oops' On Rating Of France Is Probed

By Jeannette Neumann and Mia Lamar
843 mots
11 novembre 2011
The Wall Street Journal
J
The Wall Street Journal - Print and Online
CTGWSJ
C1
Anglais
(Copyright (c) 2011, Dow Jones & Company, lnc.)

Standard & Poor's Ratings Services rattled investors Thursday after erroneously alerting some
subscribers to a downgrade of France's debt from triple-A even though it had taken no such action.
The false alarm lasted about two hours, leaving market participants to wonder whether S&P had really
taken such a drastic measure at a time when confidence in European sovereign debt is fragile.
The mistake by S&P, the firm's third high-profile misstep in recent months, comes at a sensitive time for
France, whose debt burden has stoked fears that it could be next in line for a downgrade.
"This is out of control," said Michael Church, president of Addison Capital, an investment-management
firm. Traders' computers "go wild when you have a major headline like that. Given how important these
sovereign ratings have become and how on edge markets are, for S&P to accidentally send out a note
like this borders on comical."
The Securities and Exchange Commission is expected to review the incident, according to a person
familiar with the matter. The French stock-market regulator said it opened an investigation into S&P's
erroneous message.
At around 3:57 p.m. Paris time, some subscribers to S&P's ratings website received an email alert
indicating France had been downgraded. At 5:40 p.m. Paris time, S&P said the alert was a "technical
error," adding that it was "investigating the cause of the error."
S&P said the accidental alert isn't an indication that the firm is reviewing France for a rating change.
Subscribers who clicked on a link in the alert would have seen that France's rating was unchanged, an
S&P spokesman said.
"lf it had been Germany, anybody would have just laughed it off," said David H. Levey, a former
sovereign debt-analyst at Moody's lnvestors Service. "But with France there is enough questioning
going on that it's particularly one you don't want to send any false information about."
As word spread Thursday about the message, the euro weakened against the dollar, U.S. stocks
slipped and French bond prices fell, pushing yields higher. Cash reversed course, flooding into U.S.
Treasurys and German government bonds. S&P's subsequent clarification calmed stocks and most
other markets, though French bond prices gained back only a small amount.
The error comes after Moody's, a rival ratings firm, warned on Oct. 17 that the outlook on France's
rating was under pressure.
After the financial crisis, S&P and Moody's were criticized for assigning overly optimistic ratings to
mortgage-linked securities that later imploded.
Since then, S&P, a unit of McGraw-Hill Cos., has been embroiled in a spate of controversies.
ln July, it pulled its rating on a high-profile commercial-mortgage securities deal at the last minute,
angering underwriters and investors. The firm hasn't been chosen to rate a similar type of deal since.
Then, in an unprecedented move in August, the firm cut the triple-A rating of long-term U.S. debt. U.S.
Treasury officials said the downgrade was based in part on a $2 trillion error in S&P's calculations and
lawmakers lambasted the credit-rating firm. S&P says the discrepancy was about a difference in debt
assumptions.
For some, the latest snafu raises questions about the decisions and dissemination of information at
S&P.
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"The credibility of all the rating agencies has taken a hit to a certain extent but it seems like S&P can't
get out of their own way," said Bonnie Baha, head of global developed credit at DoubleLine Capital LP.
S&P said the error wasn't triggered by "any ratings surveillance activity," quashing talk that it was set to
downgrade France.
Former S&P employees, however, say such an error is more likely to happen amid a review, meaning
that even if it was because of a "fat finger" error, those fingers were typing about France.
Those former employees said that analysts make the case for a rating or outlook change to a committee
of other analysts. After the committee approves a rating change, the technology team posts any
changes to S&P's "global credit portal." Subscribers then receive an email alert.
"The fact that there is an alert erroneously placed about France says that they may be deep in a review
of France," said Jean-Baptiste Carelus, a former S&P analyst.
Mr. Levey, the former sovereign debt-analyst at Moody's, disagreed and said S&P's release did appear
to be an error because the firm has a stable outlook on France's credit rating, indicating a downgrade is
unlikely.
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Steven Russolillo and Jean Eaglesham contributed to this article.
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