S&P's rating track record, methods criticized

Standard & Poor's headquarters in the financial district of New York is seen Aug. 6, 2011.
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We hear the name "Standard and Poor's" every day in the stock market reports. The S&P 500 is one of the indexes that measure market performance. S&P is also, of course, the company that downgraded America's credit rating.

Perhaps most baffling to investors this week is how just one company, Standard and Poor's, caused so much market turmoil.

S&P, which downgraded America's credit rating last Friday, is just one of the big three investment ratings agencies. Its two main rivals, Fitch and Moody's, disagree with the downgrade. S&P later acknowledged a $2 trillion error, and critics say S&P was wrong on the basic facts.

"I would say they didn't look enough at the ability to pay," says Jay Feuerstein, the chief investment officer of the Chicago based 2100 Xenon Group, adding that S&P focused too much on the gridlock in Washington and too little on the size and capacity of the US economy.

Feuerstein suggests that S&P overstepped its bounds and that America's ability to "meet our financial obligations regarding our debt, it's some of the best ever."

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The credit downgrade did tap into very real concerns about the deficit. S&P defends the downgrade by pointing to the end result of the painstaking debt ceiling debate. Managing director David Beers argues the actual deal adds trillions more in borrowing.

"It, in our opinion, does not go far enough to halt the rising debt burden of the U.S. government over the near to median term," Beers says.

Ironically, agencies like S&P gained their outsized power from the U.S. government, which in the 1930s began requiring the banks to use their ratings. But that power has cost the economy dearly when the agencies miss the big ones, like the collapse of Enron, Freddie Mac and the entire 2008 mortgage crisis.

In yet another irony, the downgrade of U.S. bonds has made them more valuable. That's because, as investors dumped stocks, they bought safety in the form of U.S. treasury bonds, the very investment S&P says has grown more risky.

  • Wyatt Andrews

    Wyatt Andrews is a CBS News National Correspondent based in Washington D.C. He is responsible for tracking trends in politics, health care, energy, the environment and foreign affairs.