Journalism in the Public Interest

What’s a ‘Significant Error’? Standard & Poor’s Says Leave It To Us


Just days after the Treasury Department criticized Standard & Poor’s for “a $2 trillion mistake” in the math it used to justify its credit downgrade of the United States, the ratings firm sent a letter to securities regulators urging them to keep some proposed regulations as vague as possible.

One area in which S&P had specific interest in keeping things vague? A provision that would require the firm to report “significant errors.” The letter was first noticed by Reuters, though you can see the letter for yourself [PDF] on the Security and Exchange Commission’s website.

S&P “does not believe that the Commission should attempt to define the term ‘significant error,’ ” the firm wrote. Should it do so, the commission “would effectively be substituting its judgment for that of the (rating agency).” (Reuters notes that the other two of the three main ratings firms, Moody’s and Fitch, did not raise major concernsabout the proposed rule on errors.)

In the controversy over the U.S. downgrade, Treasury officials accused the firm of making a miscalculation that “undermined the economic justification for S&P’s credit rating decision,” noting that after the mistake was pointed out, “S&P simply removed a prominent discussion of the economic justification from their document.”

According to the Wall Street Journal, however, S&P didn’t seem to agree on whether this mistake constituted a significant error:

S&P officials acknowledged the error Treasury pointed out but didn't believe it was so significant. It was a technical error, though it could have serious implications.

“We have found our error correction policy has proven to be effective,” the company told the SEC. That policy requires [PDF] the firm’s employees to “promptly report any material errors discovered” but essentially leaves it to the firm to define whether the error is significant enough to warrant disclosure or adjustment of ratings.

The SEC rule-making is mandated by the Dodd-Frank financial reform bill, passed by Congress last year to clean up after the financial meltdown of 2008.

In its comments on the rules, S&P sought more discretion than regulators had proposed. “The Commission should not set out such detailed requirements,” the company wrote regarding a proposal to require more reporting on firms’ internal control structures.

The rules also require ratings firms to limit the interaction between employees involved in developing ratings and employees involved in sales and marketing activities—the idea being to prevent the sort of conflicts of interest that some say aided and abetted the creation of risky mortage-backed securities.

S&P urged the SEC not to define “sales and marketing activities.”

“We think it is appropriate for individual (rating agencies) to define these activities for themselves,” the company wrote.

Meanwhile, advocates of reform expressed disappointment on key aspects of the rules regarding internal controls and conflicts of interest. In a separate letter, Americans for Financial Reform and the Consumer Federation of America urged the SEC to enact more stringent rules in those areas and to provide “extensive clarification” on other aspects of the proposed regulations that the groups felt were too vague to be meaningful.

without transparency there can be no accountability - rules need to force transparency, since the ratings agencies seem intent on hiding process failures from consumers…....

That is a classic on par with Kyl’s excuse when he misrepresented Planned Parenthood’s activity as “not intended to be a factual statement.”  I hope my kids don’t read these ridiculous excuses from supposed adults, or I’ll never get a straight answer from them.

After what they contributed to the giant crash by rating all those CDO’s as AAA, I’m surprised they have any credibility at all.  The credit rating agencies should be totally reorganized to shift their incentives away from pleasing the ones who pay them.  More transparency, more accountability.  Funny how the Republicans used to preach about responsibility.  I guess that was then…

Also just heard that the tea party was downgraded to KK+.  Now this seems appropriate

Mike H, your understanding is really a misunderstanding. They changed the “reason” for the downgrade after being informed by the White House that they miscalculated by 2 trillion.

Initially, the reason for the downgrade was that the $2 trillion in cuts wasn’t enough, they wanted $4 trillion. Then when there mistake was pointed out, the reason changed to a political one.

Here you go, let me know what you need to have explained.

What a clever kneepad line too, boy you’re a real wit.

Its my understanding that S&P based its decision on the trend of the debt as a share of the overall economy and the governments unwillingness to tackle it. Nothing in the correction of the $2 trillion dollar error does anything to alter either of those two, largely uncontroversial, underlying assumptions.

But following the marching orders from above, ProPublica agrees with the administrations game of rearranging deck chairs on the Titanic instead of looking at the underlying reason for the downgrade.

Catherine Tripp

Aug. 10, 2011, 4:41 p.m.

S&P’s executives have been getting away with Conflicts of Interest that made them millions, and their CDO ratings could have used some scrutiny in 2007, dontcha think?  I am glad this came out, maybe now that Uncle Sam’s been punched in the eye, the SEC and the Frank Dodd regulation writers will punch back at these overly powerful agencies.

In the case of the financial industry, a “significant error” is the one they make when they underestimated the size of the syringe they used to try and suck every last drop of blood out of you and overestimated the amount of effort they had to put into deluding you, so they could strap you to the table without resistance.

Looking at the situation from a relative distance (Australia) it seems obvious that in reading a ratings agency report that one should do one’s own due diligence. In this situation the S&P analysis is substantially correct notwithstanding a $2 trillion error in the substantiating calculations.
Having read the S&P report, its conclusions are substantially similar to one issued by the Dagong ratings agency in China a year ago. Anybody with even a passing association with has trouble sleeping afterwards when the enormity of America’s public-sector deficits is laid out.
Eventually though at some stage in the future the” merry-go-round” stops and it looks like we are now about to pay the price for decades of profligacy by irresponsible governments and gullible and indifference by fundamentally stupid electorates.

It would appear to me that S&P seeks to attain the ability to manipulate the stock market without being forced to include reality in its pontifications.

Which tells me that a) those 401K contributions of the American middle class are entirely too tempting and b)  Wall Street is planning ahead should the Republicans succeed in getting the Social Security Trust Fund placed within draining range.

If Congress wants to do something to protect the retirement funds of the working class, they could start by allowing people to manage their own 401(K) plans instead of locking them up with big money managers chosen by their employers. During a merger or takeover retirement funds are tied up for months at a time while the stock market tumbles. Why not allow employees to rollover their 401(K)s accounts at any time? Why should they have to wait for their employment to end to access their accounts? This is something Congress can fix that will cost them nothing.

It’s a shame we can’t just state what’s going on:
“... S&P didn’t ***seem to agree*** on whether this mistake constituted a significant error ...”
“... prevent the sort of conflicts of interest that some say aided and abetted the creation of risky mortage-backed securities ...”
etc, etc, ...
Come on—just call a spade a spade!  “S&P denied that the mistake comstituted a significant error.”  “... prevent the conflicts of interest that made the ratings agencies take bribes to inflate their ratings of the worthless junk created by criminal companies and foisted off on the rest of the world as AAA securities ...”
We don’t have to be so mealy mouthed ...

Pierre de Ravel

Aug. 11, 2011, 7:51 a.m.

Dodd Frank’s provisions on rating agencies are a bandaid on a dyke.At the root is the problem of the conflict of interest that cannot be avoided no matter what chinese walls you erect.The only way to solve it is to force the agencies to return to their original business model: revenues from subscriptions instead of from the rated issuers.
In so far as sovereign debt is concerned,since the factors to be considered for evaluating a country’s ability,and willingness,to repay are largely socio-political,how can a rating agency,unless suffering from terminal hubris or playing a very dangerous game ( remember cui bono?) ,claim that its methodology for rating private issuers can be mathematically- or so they like to give the illusion- applied to sovereign issuers and at they have the skills necessary to judge a political process?S&P’s downgrade of the USA also makes a mockery of a vigourous public debate on important issues so central to the preservation of the democratic values we hold so dear.
At the very least,on sovereign debt,since any respectable analysis will ,of necessity, contain many nuances and hypotheses, agencies ,if permitted to write an opinion,should nonetheless be prevented from ascribing a numerical grade that only fosters intellectual laziness on most everyone’s part and is a handy substitute for not slogging through the analysis.

S&P is but an arm of Goldman-Sachs and the Republican Party and Tea Party. These banks want QE3 so they can continue to rob the citizens of this country.

This is two fold exercise. One: to continue the robbery of our wealth and Two: to get the “Black Man” and the Democrats out of their hair so they can continue the robbery.

S&P is how we got into this mess with mortgasge backed securities that they found to be AAA and which “tanked” the entire US and European economies.

S&P has absolutely no credibility. They should be brought up on criminal charges. History will record their false ratings as the entire reason for the 2008 crisis.

If S&P are looking for exemptions from (a) telling the truth and (b) profiting from insider knowledge of future reports, then their motivations are clear:  Either this past week has been a shakedown for money (short stocks, sell gold to suckers, buy stock at depressed prices) or they’re thinking hard about doing it soon.

Can someone please explain to me WHY S&P downgraded the U.S.; however, they did NOTHING to downgrade the other countries who have worse problems than we do; i.e., France???  Sounds like a lot of BS to me!!

Barry Schmittou

Aug. 11, 2011, 12:03 p.m.

S&P is one of many branches of the sophisticated mafia that controls the U.S. and world government.

Ephesians 6:12 in the Bible says we are fighting cosmic forces of evil, powers and principalities, wickedness in high places.

I believe this provides the only explanation to the intricate and identical patterns of greed we see all around the world.

I had Buddhist and Christian beliefs before the Obama and Bush administrations showed me how extreme and connected the corruption is.

The evil is not vague, it is connected to many no conscience psychopaths. They are destroying our world, and I believe our only hope is to do what we can to help stop the injustices, help people who are suffering, and pray to God as often as we can !!

I respect everyones spiritual beliefs, but as things get worse I hope people will have something to turn to for relief.

For me it’s praying often, because soon I will have insufficient money for medical treatment while Obama’s felon campaign contributors at MetLife, who admitted to multiple frauds in their latest Non Prosecution agreement regarding sales of policies, are ignoring the great majority of my medical records in determinig the claim of the policies they committed frauds to sell !!

If you do not agree with my thoughts about God, I hope everyone understands that Dylan Ratigan is right when he said trillions have been stolen from our economy and the leaders of both political parties are responsible for allowing this to occur !!

If you’d like to see more about Obama’s felon contributors please goggle search these two series of words :

treason Obama AIG MetLife Prudential CNA Unum ERISA DOL DOJ

Treason Evidence Presented to President Obama as Mandated By U.S. Title 18 § 2382

I would post the links but I believe ProPublica thinks that would detract from this thread of comments and I respect that.

S&P finally said their reason was the squabble not the money although this came after they made the two trillion dollar computing error that would have made their original reason an error.  I think S&P is just after those pesky regulations the democrats want to put in place to protect us from future meltdowns of this sort and S&P, like a small child, wants the key to the candy store.  It’s a growing ailment in the corporate/banking industry because the republicans and supreme court have already handed them the signal that they can eat all the candy they want, including the share of the American people.

James B Storer

Aug. 16, 2011, 11:55 a.m.

Mister Schmittou, your quote from Ephesians 6:12 “…fighting cosmic forces of evil, powers and principalities, wickedness in high places” states our predicament better than anything else I have come across.  You also commented:  “The evil is not vague, it is connected to many no-conscience psychopaths.”
Indeed, we are in desperate straits.  The word cosmic denotes unworldly large in intensity and extent.  It is an adjective.  We are in the habit of assigning various personages and organizations as the evil principalities, powers, and high placed wickedness.  Thus, we are simply flailing away at shadows to no avail.  Our comments today about S&P will have no effect on S&P.  The overriding evil, no-conscience psychopath is a spiritual and unworldly adjective that has grown too large to be persuaded in terms of a jigsaw composed of nouns (corporations, leaders, S&P, umpteen trillion dollars (?) etcetera).  There is no such thing as a hundred trillion dollars – it is simply a convenient abstraction.
We have become so used to accepting self-serving greed and corruption as the moral and ethical standard set from above that our society has become severely degraded.  We are in danger of becoming dispirited slaves.
The destructive prejudice of the worldwide corporate and government support of the great evil cannot be removed.  We will not be successful against this mindset of world-wide corruption and greed by in-your-face intimidation.  Prejudice cannot be eliminated by mandate.  However, tolerance can be enforced.  Greatly increased intelligent neighborhood discussions would help in opening our eyes.  We must admit that we, the electorate of this nation are largely apathetic and ineffective, although the two political parties are responsible for this.    Skartishu, Granby MO

Catherine G. Tripp

Feb. 6, 2013, 4:15 p.m.

And in Today’s News - S&P FINALLY sued!  Woot!  Jesse Eisinger and I have been telling you so!

Barry Schmittou

Feb. 6, 2013, 5:43 p.m.

Nice article Catherine. I still hope someday we’ll have real justice and see prosecutions of the corporate psychopaths that are destroying our planet.

James I just read your comment, I must have missed it because of my vision probs due to my eye had cancer removed. I appreciate the confirmation you posted. Your comment is especially refreshing to me since there are many times that commenters get attacked on ProPublca like I have been attacked because I’m sure both political parties are controlled by wealthy elite psychopaths. My evidence keeps growing and I spoke to Republican Marsha Blackburn in person and had many prominent business people contact her and Issa and Grassley but they did nothing about all the corporate crimes Obama is protecting and the Obama bribery as seen at :

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