Letter to The Honorable Mary L. Schapiro Chairman Securities and Exchange Commission

Letter

Congresswoman Waters (CA), Ranking Member on the Subcommittee on Capital Markets and Government Sponsored Enterprises, today wrote two letters calling for action following Standard & Poor's (S&P) historic downgrade of U.S. government debt on Friday, August 5th.

In her first letter, Congresswoman Waters wrote to House Financial Services Committee Chairman Spencer Bachus, and Subcommittee on Capital Markets and Government Sponsored Enterprises Chairman Scott Garrett, calling for a hearing examining the implications of S&P's downgrade on the still-fragile U.S. housing market, interest rates on consumer loans, and the borrowing costs for some state and local governments. Congresswoman Waters also called on the Chairmen to examine the impact of an S&P calculation error included in their downgrade analysis, potential conflicts of interest at the ratings agency, and the extent to which the downgrade was based on subjective political analysis from S&P, among other areas of interest.

In her second letter, Congresswoman Waters wrote to Securities and Exchange Commission Chairman Mary Schapiro, asking her to investigate whether the credit rating agency Standard & Poor's (S&P) selectively disclosed information about a downgrade of U.S. government debt to certain financial institutions before that information became available to the public. This request is in response to several news reports indicating that various banking industry executives held meetings with S&P on Thursday and Friday, before S&P's Friday night public announcement of the downgrade. News reports have also raised questions about heavy trading volume and a large sell-off of equity securities during the day on Friday.

"Credit ratings agencies, including S&P, have a track-record of poor performance leading up to the 2008 financial crisis, rating mortgage-backed securities and collateralized debt obligations as AAA, often without scrutinizing the underlying loans. And even when they knew their analysis was faulty, they continued to crank out favorable ratings in order to preserve and increase their profits. Famously, an email from an S&P employee to a colleague noted, "let's hope we are all wealthy and retired by the time this house of cards falters.' Given their history of consistently and significantly inaccurate ratings, as well as conflicts of interest, I think it is appropriate for the Financial Services Committee to take a look at S&P's recent action regarding the sovereign credit rating of the U.S.," Congresswoman Waters noted.

The Honorable Mary L. Schapiro
Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Dear Chairman Schapiro:

I am writing to request that you conduct an investigation into whether the ratings agency Standard & Poor's (S&P) selectively disclosed its downgrade of United States government debt to certain financial institutions before it made that information available to the public.

As you know, late in the day on Friday, August 5th, S&P lowered the long-term sovereign credit rating on the United States of America to "AA+' from "AAA.' This historic step contributed to significant market turmoil on Monday, August 8th, the first trading day following S&P's announcement, with U.S. stocks experiencing their worst declines since the 2008 financial crisis.

In the days following the downgrade, news outlets have reported that various banking industry executives held meetings with S&P on Thursday and Friday, before S&P's Friday night public announcement of the downgrade. News reports have also raised questions about heavy trading volume and a large sell-off of equity securities during the day on Friday.

I believe that these reports raise certain questions about the conduct of S&P that deserve further scrutiny by the Securities and Exchange Commission, including an examination into whether any regulatory violations took place. Rule 17g-4 promulgated under the Securities and Exchange Act of 1934 states that "the written policies and procedures a nationally recognized statistical rating organization establishes, maintains, and enforces to prevent the misuse of material, nonpublic information pursuant to section 15E(g)(1) of the Act must include policies and procedures reasonably designed to prevent…the inappropriate dissemination within and outside the nationally recognized statistical rating organization of a pending credit rating action before issuing the credit rating on the Internet or through another readily accessible means."

Given the historic nature of S&P's downgrade, and the tremendous market volatility experienced after that downgrade, I feel it is appropriate for the Commission to conduct an investigation into whether S&P selectively disclosed information related to the U.S. government debt downgrade to any financial institutions, and whether any institutions that had that non-public information traded on that information prior to the official announcement.

If you have any questions about this request, please contact Amanda Fischer of my office at (202) 225-2201. I appreciate your swift attention to this important matter.

Sincerely,

Maxine Waters

Ranking Member

Subcommittee on Capital Markets and Government Sponsored Enterprises

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