The Obama Administration Would Be Right at Home on Wall Street

You might find this shocking: the Obama administration did not want Standard and Poor's to lower its outlook on U.S. debt from "stable" to "negative." I know: it's pretty hard to imagine. Why would the government want its nation to appear as fiscally stable as possible? It's totally puzzling. But some political pundits are appalled -- appalled! -- that the Obama administration might try to change S&P's mind about its rating action. Wouldn't it be more appalling if the administration had shrugged?

Here's an excerpt from a FoxNews article providing one angry reaction:

Republican National Committee Chairman Reince Priebus said in a tweet, "It is alarming that the WH would encourage S&P to suppress a damaging fiscal report for Obama's partisan speech."

Is it? It would have been alarming if the administration sought to suppress information that S&P intended to reveal that we didn't already know. It didn't. The rating agency did not provide the revelation that the U.S. has a deficit problem. We already knew that; S&P just provided its opinion that the deficit problem isn't improving as quickly as it would prefer. It's the government's job to fight for the nation's fiscal image, so it's no wonder that the Treasury attempted to defend itself against S&P's criticism.

And yet, this provides an amusing double-standard. If you followed the financial regulation battle, then you heard, ad nauseum, reform advocates complaining about the relationship between investment banks and rating agencies. They said investment banks commonly fought for strong ratings on deals that contained bad loans. Often, they were persuasive, and the rating agencies caved. Isn't that kind of like what went on with the government and S&P? The difference is that the agency went ahead with its rating action anyway.

There's a key difference, of course. That's the potential conflict-of-interest on Wall Street: the banks also paid the agencies for their ratings. If they didn't like what the agency came back with, then they could just go to a different one or threaten to do so. Unfortunately for the Treasury, it couldn't simply tell S&P that it would go to Fitch Ratings instead. The market would flip out if suddenly the U.S. government was no longer rated by S&P. Moreover, S&P would have simply provided the rating anyway, unsolicited: it's not going to stop rating U.S. debt.

So was the Obama administration wrong to try to persuade S&P to keep its government debt rating outlook "stable"? Not at all -- just like bankers weren't wrong to fight for the highest ratings they could get for their bonds. Ultimately, they're both just acting in their own best interest. Fortunately, the U.S. government doesn't have any leverage to coerce rating agencies to see things its way. Despite the new financial regulation bill, banks still do.