In an admitted "technical error", the international credit rating agency Standard & Poors downgraded French sovereign debt on Thursday, triggering extreme market volatility, before reversing the downgrade and restoring France's AAA rating.
This incident brings to mind S&P's downgrade of U.S. sovereign debt from AAA to AAa earlier this year. At the time, S&P acknowledged that they had made significant mistakes in their longer-term fiscal projections, but that these errors did not substantively change the U.S. credit outlook, sparking outrage and cries of foul play from the Treasury Department.
Also, it is important to recall that S&P had maintained investment-class ratings on the mortgage-backed derivatives, called CDO's, literally up to the very moment that the market for these securities collapsed, leading to the demise of Bear Stearns and Lehman Brothers. When challenged by a Senate panel as to their decision to grant CDO's an investment-class rating, when in reality they merited junk status, executives for S&P stated that their credit rating decisions are merely "opinions" that enjoy First Amendment protections.
"Opinions shielded by the First Amendment"? They have got to be kidding. The posts on my blog, for which I receive no remuneration, are opinions shielded by the First Amendment. Credit ratings are the result of professional analysis that the credit rating agencies are fee-contracted to perform, and these ratings are the basis on which important investment decisions are made. If mistakes are made that result in money lost by investors who have paid a credit rating agency for their guidance, then the credit rating agency should be held be liable for civil damages.
I strongly urge Congress to enact legislation regulating the credit ratings agencies and providing for a mechanism by which they can be held legally accountable for their malfeasance.
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