Standard and Poors Faces The Heat For Downgrading US Debt

August 19 00:00 2011

New York, August 18 ( – On August 5 2011, Standard and Poor’s sent financial markets across the world into a tailspin and caused political turmoil across the US when it downgraded the US national debt from AAA to AA+. Not surprisingly then, the world’s top credit rating agency is all set to face the heat from US government officials.

According to a report by the Montreal Gazette, US officials are investigating the alleged misconduct of Standard and Poor before the financial turmoil of 2008. Reports say that it is possible that some analysts had discovered that the mortgage backed bonds needed to be downgraded. But their suggestions were suppressed by Standard and Poor’s senior management in a bid to gain more business from the banks that were issuing these bonds.

This raises questions as to how stable this credit rating system really is. A credit rating agency like S&P is supposed to judge the creditworthiness of a bank and is paid by the bank to do so. It is logical to assume that Standard and Poor would want to maintain good relations with banks who happen to be their clients and the only revenue source. Can an objective decision be reached by a credit rating agency in such a system is a question that remains unanswered.

However, the fact that only S&P is under the scanner while there are no similar reports about Moody’s and Fitch suggests that it may be a backlash by the US government for the daring move S&P made on August 5, 2011. The US government is not acting against Moody’s and Fitch that did not downgrade US debt rating.