On Downgrades and Grades; or, Dude, Score Thyself

Yesterday, in a post on her New Yorker blog, Close Read, titled “Rioting Markets,” Amy Davidson, commenting on a surreal week in our markets and cities, a week when one wondered, like Yeats wondered, if the center can hold, said, “We lost our credit rating, after all, in large part because of a riot by ostensible grownups in Congress.” What Amy is saying is that the reason for the downgrade was S&P’s feeling that Congress was unable to lower debt by increasing revenue (i.e. raising taxes), and based on what S&P’s David Beers said following, that the Bush tax-cuts should be repealed, we agree with Amy’s comment, but, and while Yeats could not afford to quibble, the gyre widening as he wrote, quibble we must with Amy’s saying “we lost our credit rating,” for we did not lose our credit rating. We were “downgraded” from AAA to AA+. And even to call this change a downgrade, while accurate, misses an opportunity to talk about the incredible and arcane chicanery of the rating system. It’s like school grades, only worse.

Here are the possible ratings that Standard & Poor’s might assign to an organization: AAA, AA+, AA, AA-, A+, AA-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC to C. Was there ever a school report card this complicated?

In the recent S&P downgrade, the US was rescored from a grade of AAA to a grade of AA+. For comparison, think of student grades, think A-. Still a good score, excellent, in fact, right? But the general reaction to the S&P downgrade bears some similarity to the grade inflation in US schools, for an A-, as Louis Menand has pointed out, means failure where “American colleges notoriously inflate grades, but they can never inflate them enough, because education in the United States has become hypercompetitive and every little difference matters.” Thus, students who receive a grade of A- may react as if they’ve just been given an F.

But what does AA+ mean in S&P’s widening gyre? Basically, the score is a stress test. The scores indicate what economic stress level an organization ought to be able to bear and still withstand default. So what is economic stress, and how is that measured? S&P’s explanation for a score of AA includes the ability to withstand a 70% decline in the stock market. That’s like saying you ought to be able to chugalug a 5th of Southern Comfort and still sing the alphabet song backwards.

Switch to an imagined conversation between Bill and Ted. “What’d you get on the big math test, Dude?” “BB, Dude.” “Most excellent, Dude! Rock on!” An S&P score of BB indicates the ability to withstand a 25% drop in the stock market. Dude, score thyself.