WASHINGTON — The Securities and Exchange Commission is scrutinizing the method Standard & Poor's used to cut the U.S. credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.
SEC inspectors are examining S&P's policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the U.S.'s credit rating Aug. 5, said the person, who declined to be identified by Bloomberg News because the inquiry isn't public.
S&P's downgrade of the United States contributed to an equity rout that erased about $6.8 trillion from global stocks since late July. U.S. officials have said the downgrade was based on a flawed analysis that overstated the nation's debt by about $2 trillion, while S&P said the discrepancy doesn't change projections that the U.S. debt-to-gross domestic product ratio will probably continue to rise in the next decade.
The rating company lowered the nation's AAA grade to AA+ after warning on July 14 that it would reduce the ranking in the absence of a credible plan to decrease deficits even if the nation's $14.3 trillion debt limit were lifted.
S&P "published several reports and broadly communicated our views regarding the potential impact on other fixed-income securities," the July statement said.
The decision was at odds with the other two main ratings companies, Moody's Investors Service and Fitch Ratings, which both said the U.S. continues to deserve the top credit rating.
SEC staff members also are looking into whether certain market participants learned of the downgrade before its announcement. The inquiry, which is in preliminary stages, may not result in a referral to the SEC's enforcement division, the person said.
The downgrade followed an Aug. 2 agreement among U.S. lawmakers to raise the nation's debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion that S&P had said it preferred. The political wrangling that preceded the debt pact was also a concern, S&P said.
The "debate this year has highlighted a degree of uncertainty over the political policymaking process which we think is incompatible with the AAA rating," S&P analyst David Beers said in an Aug. 6 conference call with reporters.
Former Treasury Secretary Henry Paulson said he would invest in U.S. government securities before other sovereign debt even though the nation's political process isn't working as well as it could be.
"Our political process, our government, hasn't been working at a AAA level," Paulson, 65, said Thursday. "I would take U.S. Treasurys over other sovereign debt, other AAA sovereign debt, any day of the week. That's not to say we don't have important issues to deal with in this country."
Bill Gross, manager of the world's biggest bond mutual fund, said on Aug. 7 that S&P "demonstrated some spine." The manager of Pimco Total Return Fund has said that Treasurys are unattractive because yields don't offer enough compensation for the risk of inflation.
Still, U.S. bonds remain in demand at a time when Europe's debt crisis threatens to spread to Italy and Spain from Greece, Ireland and Portugal.