SEC reviews S&P's downgrade math

The Securities and Exchange Commission (SEC) is reviewing the method Standard & Poor's used to cut the US'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 US's credit rating on August 5, said the person, who declined to be identified because the inquiry isn't public.

S&P's downgrade of the US for the first time triggered an equity rout that wiped about $6.8 trillion from the value of global stocks from July 26 to August 11. US officials have said the downgrade was based on a flawed analysis which overstated US debt by about $2 trillion, while S&P said the discrepancy doesn't change projections that the US 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.

The decision was at odds with the other two main ratings companies, Moody’s Investors Service and Fitch, which both said the US continues to deserve the top credit rating.

POSSIBLE LEAKS
SEC staff are also 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.

Ed Sweeney, an S&P spokesman, said the firm doesn't discuss specific interactions it has with regulators.

“S&P takes its confidential information and securities trading policies, and the related securities regulation, very seriously,” Sweeney said in a statement. “Our policies prohibit analysts or rating panel members from trading and holding securities or options of the companies or governments they rate.”

Sweeney said the firm has "long-standing policies and procedures in place" to protect confidential information. Sweeney also said the firm had previously indicated in a July statement that there was a chance of a downgrade.

S&P "published several reports and broadly communicated our views regarding the potential impact on other fixed-income securities," the statement said.