Standard & Poor's Downgrades US Credit Rating From AAA to AA+


Treasury Rips S&P 'Judgment Flawed by a $2 Trillion Error'

The downgrade puts heat not only on the government. The uncertainty surrounding the U.S.'s formerly perfect AAA rating has thrust the three major ratings agencies into the spotlight, raising questions about the significance and boundaries of their credit assessments.

Robert Reich, former labor secretary in the Clinton administration, earlier called the prospect of an S&P downgrade "the height of hubris" in light of the Aug. 2 debt deal.

Hours before the downgrade, a government official said S&P's analysis was "based on flawed math and assumptions" and that "S&P has acknowledged its numbers are wrong" during communications with the Obama administration.

Sources said S&P ultimately corrected its error -- neglecting to subtract about $2 trillion, relative to the March 2011 Congressional Budget Office baseline -- and issued its downgrade statement reflecting debt-to-GDP projections that are far more conservative and in line with CBO's expectations.

Nevertheless, a Treasury Department spokesperson told reporters, "A judgment flawed by a $2 trillion error speaks for itself."

The nation's banking regulators also did not appear to follow the lead of Standard & Poor's. After the downgrade the regulators -- Federal Reserve, the FDIC, the NCUA and the OCC -- issued guidance to their regulated banks, effectively telling them that despite the downgrade, they are not going to force them to change the way the U.S. debt-related holdings are treated on their books.

"For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change," the regulators said. "The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board's Regulation W, will also be unaffected."

In simple terms, the banking regulators seemed to be saying that while S&P might believe Treasuries are riskier, the banking regulators don't, and therefore the banks don't have to either.

GOP Contenders Slam President Obama

Nevertheless, GOP presidential candidates were quick to slam the White House.

Mitt Romney called the downgrade "a deeply troubling indicator of our country's decline under President Obama."

Former Obama ambassador to China Jon Huntsman ripped his former boss for "presiding over the first downgrade of the United States credit rating in our history."

Newt Gingrich tweeted, "The Obama disaster continues."

Tim Pawlenty called Obama economically "inept."

Herman Cain called it "a sad day for America," and derided Obama as "a weak leader."

Rep. Michelle Bachman, R-Minn., pushed for Treasury Secretary Tim Geithner's resignation and urged Obama "to submit a plan with a list of cuts to balance the budget this year."

Rep. Ron Paul, R-Texas, directed his fire at "the Washington establishment," but he, too, proposed "serious steps" toward an immediate balanced budget.

Critics of such rapid cuts voice concern over what they would mean to Medicare and Medicaid spending and their possible destructive impact on an already fragile economy.

Friday, the Labor Department announced that payrolls expanded by 117,000 jobs in July as unemployment fell to 9.1 percent, a bit of good news in what has been a dismal series of economic reports this summer. However, though the 117,000 number exceeded expectations, it was still considered a weak job-creation figure.

On Wednesday, payroll company ADP reported that the private sector added 114,000 jobs in July, far short of what's needed to get the job market moving again.

On Tuesday, the Commerce Department reported consumer spending fell 0.2 percent in June.

And July 29, the U.S. government said the economy expanded at a disappointing 1.3 percent annual rate in the second quarter after growing just barely at 0.4 percent during the first quarter.

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