"The US downgrade by S&P is so bizarre and unwarranted" - Robert Reich
The S&P downgrade of the United States never made sense to me. I wasn't the only one confused. Usually when something is downgraded, investors don't rush to by it. But that was how international investors responded to the downgrade. Demand for US debt actually rose. As if deaf to S&P, investors worldwide continued to regard US treasury bonds as safe -- extremely safe.
We had a mystery on our hands: Why the unwarranted downgrade? It seemed as if S&P was behaving politically. But why would any corporation enter the political arena at the invariable cost of further degrading its already tarnished reputation? It just didn't add up.
However, there could be another explanation. Today the NY Times reports:
The Justice Department is investigating whether Standard & Poor’s rated mortgage securities improperly leading up to the financial crisis...Our natural reaction to reading this news is to question the timing of the investigation. It sure looks like a retaliatory move by the Obama Administration against S&P. Many commenting on the story agree.
But one sentence in the article seemed to dispel that theory (whilst planting the seed of another):
The people with knowledge of the investigation said it had picked up steam early this summer, well before the debt rating issue reached a high pitch in Washington.S&P and other ratings agencies deserve to be investigated by the Justice Department for their key role in propping up worthless mortgage-backed securities. What really cannot be easily explained is not the timing of any investigation of S&P, but one rating agency's decision to downgrade of the world's biggest economy.
Why did S&P downgrade Uncle Sam? Might its intent have been to politicize a looming Justice Department investigation?