Outlook There is confusion over exactly what the Securities and Exchange Commission is investigating in relation to the downgrading of the US by credit ratings agency Standard & Poor's (and no one will say on the record). Some reportssuggest the SEC is conducting an insider dealing inquiry. Others think the regulator is looking into the decision itself.
It's possible that both types of inquiry are occurring, but either way, the SEC needs to be careful not to be drawn into a political witch-hunt.
On insider dealing, it is the case that in the hours before S&P's announcement of its decision a week ago last Friday, rumours swept global markets that a downgrade was imminent. S&P officials were not the only people with advance knowledge – their views were communicated to US officials – but it is not unreasonable of the SEC to look into whether anyone leaked the news with the intention of making money.
As for an inquiry into S&P's methodology, that looks harder to justify. True, there was a row about the figures the ratings agency used to inform its decision (S&P subsequently accepted the US Treasury's data but said this did not change its view that a downgrade was necessary). But while the SEC does have some powers to monitor the activities of credit ratings agencies, it will be vulnerable to charges of political bias if it emerges it has chosen to exercise those powers against just S&P within days of it making an unpopular announcement.
Since the ratings agencies, including S&P, made such fools of themselves during the creditcrisis, they have rightly been subjected to more regulatory scrutiny than in the past. On both sides of the Atlantic, regulators are now expected to satisfy themselves that these organisations, which wield such huge power with the decisions they make, are using that power responsibly.
But regulators must be responsible too. S&P should be left to get on with doing its job without fear of political intimidation. There are enough variables already to cope with in the decision-making process over sovereign debtratings – the threat of a damaging regulatory or policy response should the decision be one that the authorities do not like should not be added to those calculations.