Is anyone, anyone, surprised by this?
I can remember the moment I heard that S&P had taken US debt from AAA to AA+. I had 2 thoughts.
The first was, “Wow.”
The second was, “Wow, the Obama administration isn’t going to like this.”
And boy didn’t they.
According to recent court filing Timothy Geithner, then Treasury Secretary, called the Chairman of McGraw Hill (the company which owns S&P) and explained that S&P’s downgrade would be met with a “response” from the US government.
“S&P’s conduct would be looked at very carefully,” Geithner told McGraw according to the filing. “Such behavior would not occur, he said, without a response from the government.”
As we know, the government “responded.” Singling out S&P in a lawsuit targeted at ratings agency fraud. The proposed fine? $5 billion. For S&P that is crushing.
All because they dared to share a shred of truth about the nature of US debt.*
You see, many people believe that the only thing that counts in economics is confidence, “animal spirits.” Even if everyone on a certain level knows that something is a lie the government and its henchmen can keep things going so long as everyone tows the same line. If the powers that be all say the same thing enough times and over a long enough period the public, even the fairly sophisticated investing public, begins to think it true.
It’s the old “perception is reality” nonsense. Perception is not reality more often than not. What one perceives can be consequential, often very consequential, but often it is not reality at all.
Once one person or entity breaks from the script, once one little boy explains to the crowd that in fact the king isn’t wearing anything, then all hell breaks loose.
That’s what Geithner and the Obama administration were afraid of. Someone telling the truth, saying what everyone in their hearts knows to be true.