S&P Prepares to Fight the SEC After Trillion Dollar Errors in US Credit Downgrade

Standard & Poor’s (NYSE:MHP) is pushing back against a government proposal that would require credit raters to disclose “significant errors” in how they calculate their ratings. The Obama administration has already accused S&P of miscalculating the U.S. debt by $2 trillion over the next decade. While S&P denied any error, after a discussion with the Treasury Department, the firm downwardly revised the debt load by $2 trillion in its economic scenario, though maintaining that its debt estimates did not affect its decision to downgrade.

The Securities and Exchange Commission’s 517-page proposal includes a requirement that ratings agencies post any errors they may have made in the calculations process on their websites. S&P fired back with an 84-page letter contesting the proposal, which contains wide-ranging provisions, including that ratings agencies disclose more about their internal controls and rating methods.

S&P found particular fault with the part of the proposal requiring ratings agencies to disclose a “significant error”, asking how, and by whom, a significant error would be defined. “If the commission were to define the term significant error … we believe it would effectively be substituting its judgment” for that of the credit agency, said S&P President Deven Sharma in the letter. He further stated that S&P’s own error-correction policy “has proven to be effective and, where errors have occurred, our practice of reacting swiftly and transparently has benefited the market.”

However, Barbara Roper, director of investor protection for the Consumer Federation of America, begs to differ. “What was their correction policy on their Enron rating? What was their correction policy on their Lehman rating? What was their correction policy on their Bear Stearns rating? They don’t have an error correction policy — they have an error denial policy, and the SEC is absolutely right to step in,” said Roper.

The regulatory proposal was added into Dodd-Frank after ratings agencies issued top ratings to toxic sub-prime mortgage-backed securities and were subsequently slow to downgrade them. Earlier this year, a Senate investigative panel issued a report partly blaming S&P and Moody’s for the financial crisis. S&P, Moody’s (NYSE:MCO), and Fitch have spent over $1 million lobbying against the new regulations this year.