Losing Credibility: White House Attempt to Pressure S&P Exposes Double Standard

After Railing Against the Credit Rating Manipulation that Caused the Financial Crisis, the Obama Administration Tries to Engage in Some of Its Own

Despite feigning a lack of concern over Standard & Poor’s decision to downgrade their outlook on U.S. debt from “stable” to “negative,” the Obama administration was actively pressuring the agency not to change their rating, according to reports out Wednesday morning:

OBAMA WHITE HOUSE “PRIVATELY URGED STANDARD & POOR’S” NOT TO LOWER OUTLOOK TO “NEGATIVE”: “The Obama administration privately urged Standard & Poor’s in recent weeks not to lower its outlook on the United States — a suggestion the ratings agency ignored Monday, two people familiar with the matter said.

“Treasury Department officials had been discussing with S&P whether the ratings agency should change its outlook on the United States to “negative” from “stable,” an indication that the country could lose its crucial AAA rating in coming years over its soaring debt levels.”

“Treasury officials told S&P analysts that they were underestimating the ability of politicians in Washington to fashion a compromise to curb deficits, a Treasury official said. They argued a change in ratings was not needed at this time because the debt was manageable and the administration had a viable plan in the works, the official said.” (Zachary Goldfarb, “Obama Administration Officials Tried to Keep S&P Rating at ‘Stable’,” The Washington Post, 4/20/2011)

GEITHNER PUSHES BACK ON S&P DOWNGRADE: “Treasury Secretary Tim Geithner said Tuesday that there was ‘no risk’ that the U.S. would lose its top credit rating amid a new analysis warning of a downgrade in American debt.

“Geithner took to the airwaves of financial news networks to push back against a report on Monday by Standard & Poor’s that downgraded its outlook on U.S. debt to ‘negative,’ reflecting political uncertainty over whether lawmakers could reach an agreement to address long-term debt.” (Michael O’Brien, “Geithner: ‘No Risk’ That U.S. Loses Its Top Credit Rating,” The Hill, 4/19/2011)

This attempt to tinker with the independent judgment of credit rating agencies is deeply concerning, given that such manipulation by banks played an instrumental role in precipitating the financial crisis. The well-documented relationship between credit rating manipulation and the current economic crisis raises questions about the propriety of White House attempts to pressure a credit rating agency to change its independent assessment prior to releasing a decision:

THE NEW YORK TIMES: “ANALYSTS FELT PRESSURED TO GIVE INVESTMENTS A CLEAN BILL OF HEALTH OR RISK LOSING BUSINESS”. “Credit rating agencies play a crucial role in the financial system, and played an important one in the events that led to its near-collapse in 2008. The business is dominated by three firms whose job it is to provide an objective analysis of the risk posed to investors by bonds, companies and countries. During the housing boom, the system broke down, as hundreds of billions of dollars of assets later shown to be worthless received high ratings from one of the agencies.Critics say there is a conflict of interest inherent in the fact that the raters are paid by the entity whose debt is being rated — a bit like a restaurant reviewer being hired by the chef — and investigations have turned up evidence thatanalysts felt pressured to give investments a clean bill of health or risk losing business.

“Without question, the credit rating system is one of the capitalism’s strangest hybrids: profit-making companies that perform what is essentially a regulatory role. The companies serve the public, which expect them to stamp their imprimatur on safe securities and safe securities alone. But they also serve their shareholders, who profit whenever that imprimatur shows up on a security, safe or not.” (“Credit Rating Agencies,” The New York Times, 6/3/2010)

Meanwhile, the Obama administration has made little secret of its disdain for Wall Street’s ratings manipulations—a position that is especially noteworthy in light of the White House’s recent attempt to pressure S&P with its own political interests at stake. It’s the kind of doubletalk that’smade in Washington:

THEN-SEN. OBAMA, MARCH 2008: “We must investigate ratings agencies and potential conflicts of interest with the people that they are rating.” (Damian Paletta and David Wessel, “Obama at Cooper Union: Then & Now,” The Wall Street Journal, 4/22/2010)

PRESIDENT OBAMA, AT SIGNING OF DODD-FRANK BILL, JULY 2010: “Now, while a number of factors led to such a severe recession, the primary cause was a breakdown in our financial system.  It was a crisis born of a failure of responsibility from certain corners of Wall Street to the halls of power in Washington.  For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy. …  And soon after taking office, I proposed a set of reforms … to bring the shadowy deals that caused this crisis into the light of day, and to put a stop to taxpayer bailouts once and for all. ” (President Barack Obama, “Remarks by the President at Signing of Dodd-Frank Wall Street Reform and Consumer Protection Act,” The White House, 7/21/2010)

When Obama holds his Facebook town hall this afternoon to talk about his plan for deficit reduction, will he own up to his administration’s attempt to pressure Standard & Poor’s to cover up its assessment that his administration is not serious about addressing the nation’s debt crisis?:

“Obama’s stop is the latest in his Shared Responsibility and Shared Prosperity town hall series, where he’ll pitch his deficit reduction plan and address continued economic angst while taking questions from some of the network’s 500 million users. …

“And the Facebook town hall, while an official event, just so happens to come two weeks after Obama launched his 2012 re-election bid – a rollout that included a Facebook drive for users to announce they were ‘IN’ as well.”(Michael A. Memoli, “With Town Hall, Obama-Facebook Friendship Continues,” Los Angeles Times, 4/20/2011)