S&P Fights for the Right Not to Admit "Significant Errors"

Last Updated Aug 11, 2011 1:45 PM EDT

Standard & Poor's is a lot like Madame Marie the Psychic: Both make lousy predictions, never admit mistakes and don't want you to know how they operate. That's why S&P is fighting a law requiring it report "significant errors."
McGraw-Hill's (MHP) S&P certainly has a flare for irony. Just days after its subjective and likely flawed analysis knocked the U.S. credit rating down a notch, it attacked an SEC regulation requiring ratings agencies to admit when a "significant error" is shown to exist in their methodology. In a letter to the SEC, S&P President Devan Sharma wrote:"If the commission were to define the term significant error ... we believe it would effectively be substituting its judgment" for that of the credit-rating agencies.

And that would be bad ... why? Apparently because "credit ratings reflect the subjective opinions of committees of rating analysts." The subjectivity of these opinions make it "difficult, if not impossible, for the Commission to establish a principled definition of what might constitute a 'significant error.'"

He then goes on to defend S&P's own error correction policy (chutzpah, thy name is Sharma!). He says it "has proven to be effective and, where errors have occurred, our practice of reacting swiftly and transparently has benefited the market."

Enron? Bear Stearns? Lehmann Brothers? Having blown the initial job of judging the validity of mortgage-backed securities, did downgrading them en masse really benefit the market?

It is true S&P reacted swiftly when told there was a $2 trillion mistake in its report downgrading the U.S. credit rating. It dropped the mention from the report faster than a company dropping Tiger Woods as its spokesman. The rating, however, remained unchanged. So much for transparency.

By the way, neither Moody's nor Fimalac SA's (FIM) Fitch Ratings have felt any need to lodge similar protests. Maybe they just know a good time to shut up when they see one.

Image: Wikimedia Commons

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.