SEC makes right move by reviewing rating agency’s U.S. debt downgrade

Tuesday, Aug. 16, 2011 | 2 a.m.

It wasn’t exactly unexpected when Standard & Poor’s downgraded the United States’ credit rating Aug. 5 from AAA to AA+ following the deficit reduction plan and borrowing limit increase approved by President Barack Obama and a bitterly divided Congress. The credit rating agency had warned in the midst of the partisan stalemate that it might lower the country’s rating, a sign that it believed the nation’s ability to repay its debt was not quite worthy of the top grade. It justified the downgrade by stating that the plan “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

The downgrade not only created turmoil in global stock markets, but it also caused the Treasury Department to claim that Standard & Poor’s had committed a $2 trillion error in the calculations it used to justify the lowered rating. The Wall Street Journal reported last week that the Securities and Exchange Commission is taking that accusation seriously enough that it will review the way the rating agency arrived at its conclusion.

The scrutiny in this case is warranted. Credit rating agency opinions, while helpful to investors in determining a borrower’s ability to repay debt, should be based on facts. When the facts are in dispute, as they clearly are in this case, it is certainly prudent to give regulators a chance to help clarify matters.

The rating agencies, which include Moody’s and Fitch Ratings, should enjoy the freedom of providing valuable information to investors. But the nation’s economy cannot afford to rely on ratings that are the result of sloppy or incomplete analysis.

It’s too bad regulators weren’t this proactive during Wall Street’s subprime lending debacle that fueled the housing crisis. As The Arizona Republic reported in 2008, Standard & Poor’s and other rating agencies were criticized for masking the housing meltdown by giving inflated grades to the mortgage-backed securities tied to subprime loans. The newspaper reported that the agencies eventually got tougher in their grading of mortgage securities. But by then the damage to the economy had been done.

The nation’s downgrade possibly could have been avoided had House Republicans, who control that chamber, displayed some common sense. That means accepting the reality that the nation’s long-term debt quagmire won’t be solved without some form of tax increase on those who aren’t paying their fair share. Oil companies, for example, fall into that category, as do the wealthiest Americans. The Republican excuse that a tax on the rich is a tax on “job creators” is insincere because many large corporations are hoarding cash instead of hiring new workers. Where are all the new jobs the House Republicans promised?