I Smell a (Ratings) Rat

Standard and Poor’s recently threw the government a knuckle ball when it downgraded the US government’s credit rating. Now, its president, Deven Sharma, will step down. His replacement? Citibank COO Douglas Peterson.

I do not particularly defend S&P. These are the guys and gals who completely missed the subprime fiasco, rating many of the securities that exploded “investment” grade. There are also dubious incentives at work in the ratings industry whereby companies more or less pay for ratings. Sunday School it is not.

Nonetheless, an interesting force is at work here. Peterson has worked for Citigroup for 25 years. Citigroup has been the recipient of bailouts the magnitude of which strains the imagination. Is it merely coincidence that someone cozy with government is now running the ratings show at S&P?

Congress just plain did not like being called on the carpet for its ineptitude in dealing with the debt ceiling crisis. Sharma insists that the downgrade was mostly a reflection of the chaos surrounding that debacle in addition to the long-term debt problems of the US.

When all the dust settles, it is lenders who determine the creditworthiness of an entity, government or non-government. The ratings wars are in many ways much ado about nothing. However, it does give one pause when someone so clearly in the thick of the bailout shenanigans takes over at an offending ratings agency.

Sadly, all of this is a distraction from the real issue. No matter what our ratings, the fact remains that the US is like that digital readout on the bomb in the movies. As it counts down to zero we can argue over estimates of the amount of explosives in the device or we can get to work disarming it.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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