US downgrade ‘precipitous, wrong and dangerous’ says Legg Mason’s Bill Miller

Standard & Poor’s decision to downgrade US sovereign debt was, at best, an ingnorant one notes Bill Miller, the chief investment officer for Legg Mason Capital Management.

At best, S&P showed a stunning ignorance and complete disregard for the potential consequences of its actions on a fragile global financial system. S&P chose to take this action after the worst week in US equity markets since 2008, a week which not only saw stocks fall sharply, but which also witnessed a dangerous escalation in the ongoing European debt crisis with spreads widening to post-Euro records in systemically-important countries such as Italy and Spain amid general political paralysis. The action was wholly unnecessary and the timing could not have been worse. Compounding this, the reasoning was poor, and consequences both short and long term for the global financial system are completely unpredictable.

It is totally unacceptable that privately-owned, for-profit companies should have special, legally sanctioned status at the heart of financial system to function as quasi-regulatory authorities whose opinions can determine what securities financial institutions can hold, how much capital they need, what the borrowing costs of every member of the system will be, all based on secret deliberations without any accountability. The disastrously flawed ratings of these agencies were at the heart of the financial crisis of 2008, and this unilateral action by S&P threatens to create mayhem yet again in the system by creating uncertainty about the ability of the United States to function in its unique and critical role in the global financial system.


There was no need for S&P to rush to judgment just days after a bruising political battle had secured a bipartisan agreement to raise the debt ceiling through the next election cycle and which initiated a process to begin to cut spending and address the nation’s long term fiscal imbalances. Neither Fitch nor Moody’s saw any need to do so, and Moody’s indicated that contrary to S&P they saw the agreement as “a turning point in fiscal policy” and declared that a downgrade would be “premature.” It is unclear what benefit S&P saw in taking action when it did. It is perfectly clear they either did not consider or didn’t care what the consequences of this hasty and rash decision might be.


In addition to being precipitous and ill timed, it is also wrong. Warren Buffett as usual was right in his analysis, saying S&P was wrong to downgrade and that the US should be “quadruple A.” There are at least three reasons why S&P was wrong to downgrade. First, it is incredible that S&P should think the US is less creditworthy on a short or long term basis now than it was two weeks ago, when an agreement to raise the debt ceiling had not been reached, both parties appeared intransigent, and contingency plans were being considered including prioritizing payments or even declaring the debt ceiling null and void under Section 4 or the 14th Amendment.

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