Standard & Poor's, better known as S&P, is a financial-market intelligence agency that provides investors with information on investment research and risk evaluations and solutions. The company's claims to fame are its independent credit ratings and its indexes of large cap American stocks called the S&P 500, which has been used for more than 50 years. Despite S&P's long history and loyal following, the company has lately made some notable mistakes that have affected economic security and negatively impacted its reputation among financial analysts. (For more on ratings, read The Debt Ratings Debate.)
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U.S. Credit Downgrade
The recent battles over debt in the U.S. government put the country's AAA credit rating, which it has maintain for 70 years, in jeopardy. S&P downgraded United States debt in early August 2011, dropping it to AA+ because the U.S. could not get control over it's long-term financial issues. The downgrade was no small matter. The move was intended to signal to the global market place that the U.S. was not as safe of an investment as it had been in the past. Analysts warned that it could mean higher borrower rates for the U.S, higher interest rates for consumers and downgraded credit ratings for individual states.
In response, the White House announced that it found a $2 trillion dollar error in S&P's projections of future U.S. debt. Moody's and Fitch, two other agency's that do the same work as S&P, disagreed with the downgrade. S&P admitted to the error, but fired back saying that governments should not be allowed to interfere with the analytical independence of ratings firms. The immediate effects of the downgrade were not as apocalyptic as predicted. U.S. Treasury bonds remained stable, calling into question the significance of credit rating agencies like S&P.
Japanese Credit Downgrade
S&P's relevance was also tested in April 2011 when the firm downgraded its economic outlook on Japan to negative from stable. Four months earlier, S&P had downgraded Japan's credit rating from AA to AA- and said that the country didn't have to have a plan to tackle its mounting debts. In an unexpected turn, interest rates on Japanese government bonds went lower after S&P's April announcement. This showed that Japanese investors took other factors into consideration when judging Japan and chose to disregard S&P's predictions. RuiXue Xu, a rates strategist in Tokyo at RBS Securities Japan Ltd., said in an April 27 note to clients that Japan was "immune to rating downgrades as Japan's fiscal problem has been well known to the market participants and will not force domestic investors to change their investment plans."
In August 2011, The U.S. Department of Justice made allegations against S&P for their role in the financial crisis of 2008. The government agency launched an investigation into the possibility that S&P overrated mortgage-backed securities due to pressure from business managers. The higher than normal ratings made groups of mortgages appear less risky than they actually were. Later the S&P downgraded their previous ratings. This, combined with other problematic practices by lenders, led to increased foreclosures and loan defaults when the housing bubble burst. (For related reading, check out The Ratings Game - A Solution)
While the S&P is still considered one of the top financial market analysis agencies in the world, its recent blunders have some wondering if reforms need to be made in the ratings sector. The market's lack of response to its downgrades in Japan and the U.S. also have some questioning the impact and importance of S&P and other ratings agencies. (To learn more about the rating agencies, see A Brief History Of Credit Rating Agencies.)