International

S&P balks at U.S. SEC proposal to reveal rating errors

WASHINGTON: Standard & Poor’s, whose unprecedented downgrade of U.S. debt triggered a worldwide stocks sell-off, is pushing back against a U.S. government proposal that would require credit raters to disclose “significant errors” in how they calculate ratings.

S&P, which was accused by the Obama administration of making an error in its calculations leading to Friday’s downgrade, raised concern about the proposed corrections policy in an 84-page letter to the Securities and Exchange Commission, dated Aug. 8.

The SEC is weighing sweeping new rules designed to improve the quality of ratings after their poor performance in the financial crisis.

The 517-page proposal includes a requirement that ratings agencies post on their websites when a “significant error” is identified in their methodology for a credit rating action.

The letter was sent three days after the U.S. Treasury Department accused S&P of miscalculating – by some $2 trillion – the U.S. debt in the next 10 years. That calculation was in a draft press release announcing a downgrade in the government’s credit rating from AAA to AA-plus.

S&P vehemently denied it had made an error, but acknowledged that it changed its long-term economic assumptions after discussions with the Treasury Department. It switched to another economic scenario that resulted in a debt load $2 trillion smaller by 2021. But it said that did not affect its decision to downgrade the U.S. debt.

S&P’s criticism of the “significant error” proposal is part of a broader concern that the SEC’s reforms prompted by the Dodd-Frank financial oversight law could give the U.S. government undue influence over its ratings decisions.

S&P in particular is facing a tense relationship with Washington. Its downgrade sparked a backlash from Administration officials and lawmakers from both sides of the aisle. A Senate Banking Committee aide on Monday said the panel has begun looking into S&P’s decision to downgrade the U.S. credit rating.

The SEC’s proposal, issued in May, contains a wide range of provisions, including requiring credit raters to disclose more about their internal controls, to protect against conflicts of interest, and to reveal more about their rating methods.

But one issue that really rubbed Standard & Poor’s the wrong way was the proposed requirement that raters disclose when a “significant error” is identified in a procedure or methodology – and especially, who should define what that is.

The SEC’s proposal asks questions about whether the SEC should define the term “significant error.”

“If the commission were to define the term significant error … we believe it would effectively be substituting its judgment” for the credit-rating agency’s, S&P President Deven Sharma said in the letter.

He said S&P’s own error correction policy “has proven to be effective and, where errors have occurred, our practice of reacting swiftly and transparently has benefited the market.”

Barbara Roper, director of investor protection for the Consumer Federation of America, said that policy has proven inadequate.

“What was their correction policy on their Enron rating? What was their correction policy on their Lehman rating? What was their correction policy on their Bear Stearns rating? They don’t have an error correction policy – they have an error denial policy, and the SEC is absolutely right to step in,” Roper said.

McGraw Hill’s Standard & Poor identifies numerous issues with the SEC’s proposal, including concerns about competition and that rules are consistent globally.

 
A version of this article appeared in the print edition of The Daily Star on August 11, 2011, on page 5.

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