August 10, 2011
I shouldn’t be writing this. I hold stock in McGraw-Hill, the parent of Standard & Poor’s, and for more than 30 years I worked for BusinessWeek when it was McGraw-Hill’s well-respected calling card -- before it became a cog in the Bloomberg machine.
But I can’t remain silent because of this: You (Wall Street, Washington, the general public, whomever) can’t have it both ways. You can’t pillory S&P and the other ratings agencies for not sounding the alarm before the last financial crisis—and then pillory them (or at least S&P) for delivering a sober assessment of America’s credit on the heels of the devastatingly stupid debt-ceiling crisis.
In an embarrassment that the administration seems to think should have sent multiple S&P executives leaping from the windows of their imposing financial district edifice, the rating agency got the math wrong—or more accurately, there is disagreement about its assumptions of future economic and political behavior. Certainly, it would have been smart to bullet-proof what is likely the most important rating S&P has ever rendered—taking the credit of the United States of America from AAA to AA+. But that doesn’t mean its decision to downgrade was wrong.
S&P was trying at last to do its job, however hideous the consequences. And now everybody wants to shoot the messenger with a machine gun.
What makes S&P’s decision so suspect is this: After putting its imprimatur on toxic debt that led to the 2008 financial crisis and the Great Recession, the once sterling rating agency has been struggling to reestablish its Wall Street cred and bona fides among global economic players. So it’s easy to accuse it of being overly aggressive and grandstanding for its own purposes.
And the more devious-minded might imagine that the S&P downgrade has something to do with the fact that McGraw-Hill, a somewhat odd conglomerate, has in the past couple of weeks come under intense pressure from substantial shareholders — hedge fund Jana Partners LLC and the Ontario Teachers’ Pension Plan — to unlock value by breaking itself into two entities: S&P and its educational publishing division. McGraw-Hill also owns J.D. Power and other miscellaneous businesses. What better poison pill than to make yourself the most detested public company in America?
To spin out yet another conspiracy theory, one need only look at the chairman, president, and CEO of McGraw-Hill, 62-year-old Harold “Terry” McGraw III. The still-boyish executive is intensely interested in politics and, I always thought, harbored public-service ambitions. According to the McGraw-Hill website: “He is chairman of the Emergency Committee for American Trade, chairman of the U.S.-India Business Council, chairman of the United States Council for International Business, [and] a former chairman of Business Roundtable….”
A slightly right-of-center Connecticut Republican in the George H.W. Bush mold, McGraw must be appalled by the behavior of the Tea Party yahoos and filled with contempt for President Obama’s management skills. Blame for the debt-ceiling disgrace has already landed in the lap of Congress, as its 82 percent disapproval rating demonstrates. And the criticism of Obama from the right and the left is getting louder. On MSNBC’s Morning Joe today Newsweek/Daily Beast Editor-in-Chief Tina Brown said the President “always seems a day late and a dollar short on everything.” So the downgrade and its wealth-destroying aftermath will, when the dust settles, only heighten America’s disgust with its current elected officials and make way for reasonable conservatives as we move toward a critical election year.
Those imagined backstories range from the duplicitous to the wildly far-fetched, but they deliver a sense of all the underlying complications.
So given the crosscurrents, perhaps the prudent path for S&P would have been to recognize that it was in too precarious a position on several levels to render a U.S. debt-rating judgment that would be viewed as impartial. To do so was foolhardy and courageous all at the same time.
More on the U.S. downgrade from The Fiscal Times:
S&P Downgrade Impact