S&P On the Downgrade: Leadership Matters

Organizational leadership matters. It is the pre-eminent factor in an organization's success. And its failure or weakness most often means the failure or weakness of the enterprise.

Whether we are talking about rating agencies or equities analysts, their role and responsibility is to clear-mindedly and straight-forwardly make well-informed assessments of the strength of an enterprise, their operational and financial strengths and weaknesses, and their ability to meet certain performance expectations or debt obligations. And one of the key assessments in any analyst's report I've ever read--or at least a key assessment to informed investors--is the strength and effectiveness of leadership. (I invite friend and retired Wall Street analyst, Marc Schulman, to expand on this in the comments section.)

So, after S&P announced its downgrade of U.S. debt, and after the disagreement and anger pointedly addressed at S&P for their bold and well-explained judgment, they rightly responded with what the NY Times called "a full-throated defense of its decision." And the defense was the universally acknowledged dysfunction and failings of US political leadership evidenced yet again in the "debacle" of raising the debt ceiling--a dysfunction largely the result of the bitter, partisan divide and the absence among some ideological zealots of the requisite statesmanship and willingness to indulge compromise.

From the NY Times:

A day after Standard & Poor's took the unprecedented step of downgrading the creditworthiness of the United States government, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a "debacle," and warning that further downgrades may lie ahead.  

In an unusual Saturday conference call with reporters, senior S.& P. officials insisted the ratings firm hadn't overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating. "The debacle over the debt ceiling continued until almost the midnight hour," said John B. Chambers, chairman of S.& P.'s sovereign ratings committee. Another S.& P. official, David Beers, added that "fiscal policy, like other government policy, is fundamentally a political process." 

The ratings agency put additional pressure on the joint Congressional committee to find additional spending cuts, tax hikes or both to bring down the inexorably rising national debt. 

Administration officials at the White House and Treasury angrily criticized S.& P.'s action as based on faulty budget accounting that discounted the just-enacted deal for increasing the debt limit.... "The bipartisan compromise on deficit reduction was an important step in the right direction," the White House press secretary, Jay Carney, said in a statement on Saturday. "Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges."  

Still, the posturing on Capitol Hill continued[:]  

"Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground," Speaker John A. Boehner, an Ohio Republican, said in a statement.  

Senate Majority Leader Harry Reid said the downgrade affirmed the need for the Democratic approach, which would combine spending cuts with tax increases.The decision, he said, "shows why leaders should appoint members who will approach the committee's work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S.& P. are demanding."  

---"Amid criticism on downgrades of U.S., S&P fires back--Agency skewers debt ceiling 'debacle,' warns that more downgrades may come," by Nelson D. Schwartz and Eric Dash, New York Times (8.6.11), as reported on MSNBC.MSN.com.

And the finger pointing continues, the partisan spin and legerdemain remain at center court, and their is no indication that a new sense of statesmanship is coming over those most recalcitrant and ideologically uncompromising. So, it appears it will all have to get still worse before it has any chance of getting better. And there also remains their apparent failure to recognize that the timing of deficit reduction must take into consideration the effect of anti-stimulative measures on a fragile economy, or else recession or worse will have to be added to their continuing failures.