S&P Kerfuffle Raises Free Speech Concern

Just when you think the ineptness of Congress and the President has reached its depth, they act in yet more confounding ways.  We now see that official Washington intends to open up hearings and conduct formal investigations into the rating agency Standard & Poor’s.  

This is obviously a childish retaliation for S&P’s decision to downgrade the U.S. Treasury’s debt rating from AAA to AA+.  The politicians now tread on dangerous territory: the First Amendment.

S&P and other rating agencies have long resisted regulation of their businesses on the grounds that what they do and say are matters of freedom of speech under the First Amendment. 

However laughable that may have seemed to some, even the staunchest critics must see its poignancy now.   S&P attributes its opinion about the U.S. position to political weaknesses that the Congress and the President have displayed.  It is difficult to deny that what S&P said and did was an exercise of free speech. 

The case simply strengthens when official Washington not merely rebukes the agency but threatens it.   At minimum, this complicates the task Congress and the President gave federal agencies last year to rewrite regulations applicable to rating agencies and how their ratings are used. 

Thus do Congress and the President make even worse the consequences of their political gamesmanship. As my GW colleague Jeff Manns wrote in today’s NY Times, the rating agencies are a clever crowd engaged in their own kind of game.  But official Washington must get over that and somehow gain a modicum of sophistication instead of acting like a bunch of boobs.

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10 Responses

  1. anon says:

    “bunch of boobs?” I’m waiting for reactions from the feminists.

  2. How do you distinguish the Fair Credit Reporting Act then, or is that also a violation of the First Amendment? And isn’t any accounting essentially an “opinion”?

  3. Frank says:

    First, congrats to Jeff Manns on getting a fantastic op-ed in the NYT. One more coup for the terrific GW finance/business faculty.

    Seth, as to your question, I’ve tried to run down some 1A concerns in these posts:


    I think the Bottini piece is good on the porousness of the raters’ 1A claims. I like David Segal’s point that “The First Amendment is no defense against fraud,” and I think we need to know exactly how this decision was made. Consider these concerns from Yves Smith:

    As I have noted in my pieces on Google’s ranking methods, seeking to know the reasons for/processes behind a decision is not necessarily a suppression of the opinion.

  4. Lawrence Cunningham says:

    Seth (and Frank),

    My post does not say that the First Amendment does/does not apply or should/should not apply or, if it did, how thick or thin that protection might be.

    What it says is that the argument supporting First Amendment protections strengthens when politicians in Washington react to a downgrade as they are doing, acting more foolish than responsibly.

    S&P could not have planned or hoped for a better response that its downgrade is getting, thanks to such fools.

    I should add that the White House is only partly tone deaf on this: despite its irresponsibly hysterical condemnation of S&P early on, it is trying to distance itself from the Congressional investigations.

  5. A.J. Sutter says:

    I have a couple of dumb questions based on this passage from Jeff’s piece:

    [Dodd-Frank] called for exposing rating agencies to civil liability in securities lawsuits if their ratings were inaccurate. It also challenged the oligopoly’s dominance by calling for the Securities and Exchange Commission to explore the feasibility of having an independent organization select rating agencies for asset-backed securities, instead of having the bond issuers select and pay the agencies, as they now do. [¶] But the rating agencies struck back, first through civil disobedience.To evade potential liability, they threatened to freeze the markets for asset-backed securities by refusing to allow their ratings to be quoted in S.E.C. filings. The S.E.C. quickly caved and suspended the rule.

    1. Which rule was suspended? From the piece, it seems that the part about liability was in the statute, so how could that be up to the SEC? Or did the statute just direct the SEC to cook up a reg on that topic?

    2. The SEC’s cave-in seems to rest on the assumption that the rating of the bond as set forth in SEC filings is material to buyers. Is that really how most buyers get their info (especially the less sophisticated ones)? Wouldn’t a bond-buyer normally be interested in a rating before he buys, like squeezing the fruit at the supermarket, and seek one out from some other source anyway? And wouldn’t the bond issuer want to make the ratings available somehow — even outside from SEC filings — to encourage people to buy?

    Where I’m going with this is, if people usually get their info from some source other than the SEC filing, couldn’t the rule have been crafted to make the agencies liable regardless of where the rating was promoted (à la 10b-5)? Or was there already a restriction to SEC filings built into the D-F statute?

  6. Regarding “What it says is that the argument supporting First Amendment protections strengthens when politicians in Washington react to a downgrade as they are doing, acting more foolish than responsibly.”

    I’m not sure that actually follows. I see why you would say that, and it’s an appealing idea. But if, just for the sake of discussion, there were were actionable misconduct, the result would be the same. That is, Congress/politicians getting involved in a very public financial scandal doesn’t mean the conduct suddenly becomes more First Amendment worthy somehow. The accused typically proclaims something along the lines of “This is a *political* witch-hunt!” – but that doesn’t make them innocent _per se_. Something can be both a political case, and at the same time, the accused can be guilty of wrongdoing.

    If, again, just for example, the S&P were found to have taken bribes from hedge funds in order to state “its opinion … political weaknesses that the Congress and the President have displayed.”, I don’t think this would be purely a case of free speech.

    Basically, various market manipulation crimes have both financial and speech components, and the speech components doesn’t (shouldn’t?) immunize the financial component. I think there’s actually a case about this regarding someone convicted of pump-and-dump stock scamming (with the amusing defense that the corruption is so common investors should expect it).

  7. Lawrence Cunningham says:


    If credible concerns of criminal behavior exist, doesn’t good judgment suggest that the Department of Justice, not Congress, should investigate? There still may be bias, but less political theater.

    When the politicians whose judgment is criticized by a downgrade investigate or overreact, doesn’t that inform analysis of what kind of speech is being discussed?

    It’s easy to be skeptical of the claim that a finance-based credit rating, say of AAA to Berkshire Hathaway and AA+ to General Electric, is protected speech.

    A politics-based credit rating of the U.S. Treasury seems different. When politicians clamor and threaten in response, I become more sympathetic to the free speech claims by that context.

  8. I think there’s a wide spread between “Behaving in a way that has a political component” (which is obviously the case here) and “Behaving in a way which as no other justification than a political component” (not so obviously the case here). That is, these sorts of scandals are filled with politics, but not necessarily *only* politics. So, “doesn’t good judgment suggest”, sure, but if the world followed what good judgment always suggested, for heaven’s sake, we wouldn’t be in this situation. It’s entirely possible that, again, hypothetically, there can be a real scandal, and the only way to get it addressed effectively is to make it a political circus. That’s a sad commentary on the way the world works, but so is much of the news these days in general.

    So regarding “When the politicians whose judgment is criticized by a downgrade investigate or overreact, doesn’t that inform analysis of what kind of speech is being discussed?” – again, _per se_, one can’t say that’s categorically true. It just says they’re affected. But they can be affected by e.g. blackmail, so is blackmail also political speech, protected by the First Amendment? (a well-known issue!)

    “A politics-based credit rating of the U.S. Treasury seems different” It’s different in that it mixes politics and finance. But that’s true because the US is both a financial organization and a political one. Hence having the latter override the former somehow, is problematic.

    It’s possible for a thief to be robbed, and it’s possible for politicians to be reacting badly while still being done wrong by market manipulators or similar offenses (again, I’m not claiming this did in fact happen, only that it’s a possibility).

  9. Todd Klimson says:

    What disgusts and vexes me more than anything is when a companies’ analysts downgrade a stock/bond trading at or near the 52 year low. Wells fargo just put a reco to sell Bank of America stock at $8 a share. Where were they when it was at 12.00? Or at $37.00 2 years ago??? Remember Jack Krugman? 20 buy reco’s on 20 companies that went bankrupt and he never said to sell!!! ( i believe he was tagged with 20 years behind bars) I really don’t believe this is a first amendment issue. This is just shear stupidity on the part of the investor clinging to these ratings and perhaps fraud on the part of the agency. If an investor seriously makes their investment decision based on these reco’s whether it’s Moody’s S&P, wells, Jack Krugman etc. I would say as Ezra Taft Benson once said “Bad experience is a school that only fools keep going to.”

    In the interview the veteran economist, Arthur Laffer said “Standard & Poor’s was quite right in downgrading the U.S. credit rating – in fact it should have done so far earlier.

    The agency had no choice and if the other agencies, Moody’s and Fitch, don’t do the same they won’t be doing their jobs, said Laffer, who gave his name to the Laffer Curve which demonstrates that the maximum amount of government revenue does not come at the point of maximum taxes.

    “If you had a company that had revenues of $2½ million and expenses of $4 million, with no change in sight, $1½ million in losses each year as far as the eye can see and it had already borrowed $10 million, what would you rate that company? I surely wouldn’t rate it AAA.

    “That is the U.S. situation today,” Laffer said. “Taxes are about $2½ trillion, government spending is about $4 trillion and we have about $10 trillion in net national debt. I don’t see that as being a AAA country.

    “If the S&P and the others were doing their jobs correctly, they should have downgraded a long time ago.”

    There is something sinister here or these agencies are just complete imbeciles.

    Read more on Newsmax.com: Laffer: Obama Must Use Reaganomics to Save Economy
    Important: Do You Support Pres. Obama’s Re-Election? Vote Here Now!

  10. Jeff says:

    Regarding A.J.’s questions (comment 5), the Dodd-Frank Act rescinded a special exemption (Rule 436(g)) that had shielded rating agencies from expert liability under Section 11 of the 1933 Act. As a result, rating agencies faced the possibility of civil suits under Section 11 if their ratings were quoted in registration statements and prospectuses. After the rating agencies refused to allow their ratings to be listed in offering materials for asset-backed securities, the SEC issued no-action letters that effectively suspended the repeal of the rule, first for a six month period and later for an indefinite period. As for the second question, Section 11 liability for experts applies to the offering materials, covering the time frame when ratings would presumably matter the most to prospective purchasers. The logic of having Section 11 expert liability apply to rating agencies was to build on an existing framework that balances exposure to liability for materially misleading statements or omissions with protection from frivolous suits through a due diligence defense for experts.