S&P to face withering backlash, investigations likely?

"Pardon me for asking, but who gave Standard & Poor's the authority to tell America how much debt it has to shed, and how?" Robert Reich poses a good question, noting that the downgrade of U.S. Treasuries came at a very bad time. My sense is that all the headlines and controversy may come back to haunt the company, which is increasingly finding itself on the defensive as it enters the unforgiving world of Washington politics. One issue here is the extent to which the conclusions and timing of the release were driven by marketing needs. S&P after all is in this business to make money, as it has to generate funds for shareholders of McGraw-Hill. It's corporate image is relevant in that light.

Releasing major studies or products or really anything newsworthy at the most advantageous time is of course a time-honored marketing practice. We saw this recently with McAfee's big study on cybersecurity, which was released just ahead of a major conference. S&P had reasons to inject itself into the most politically heated battle the year. Its reputation has been decimated by the financial crisis, and from an image point of view, it understandably yearns to return to happier times when it was seen as a fairly objective (rightly or wrongly) arbiter of creditworthiness. That reputation dissipated in the wake of the financial crisis, when many shocking practices on the part of credit rating companies were revealed. So whatever moral authority the company now tries to stand on is very weak. The very competence of the company--and there are some issues with its methodology--has once again become a central issue, exactly what the company doesn't want.

I'll again quote from Reich: "Had S&P done its job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn't have become so large--and their bursts wouldn't have brought down much of the economy. You and I and other taxpayers wouldn't have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldn't have had to inject the economy with a massive stimulus to save millions of other jobs

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