Downgrade?

Can the US be downgraded?

The philosophical answer is, of course. Three decades ago I heard someone asked a political speaker how a nuclear-tipped ICBM could become obsolete, and he flippantly said, “knock it out with a laser.” When the practical obstacles to such an anti-missile defense were raised, he got philosophical, and said that any weapon can become outmoded.

The point of that discussion is that missile defense and obsolete ICBMs were political issues. S&P’s lowering of the outlook on US debt from negative to neutral reflects a similarly political judgment. They framed their discussion of credit risk in the US in explicitly political terms: they estimated that there is a one-in-three chance that Congress will not reach an agreement on how to address the medium and long-term budgetary challenges by 2013.

Well, I’m shocked. Predictions about Congressional consensus? That must have really strained S&P’s financial analysis models. I wonder: did they conduct extensive district-by-district polling? Did they analyze Congressional leader’s former and current positions and do some trend analysis? Did they even look at historical precedents, like the ’94 Congress, or 1956? When did S&P become political prognosticators?

This reminds me of when a prominent bank analyst started making predictions on municipal finance, or when Ted Turner started evaluating policy at the Vatican. In both cases it was an embarrassment. S&P’s credibility has already suffered from the sub-prime fiasco. They’re now jumping into political waters during a heated budget debate. S&P should stick to financial analysis, and leave politics alone.

Douglas R. Tengdin, CFA
Chief Investment Officer
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