Treasury Dept. scrambled to dissuade credit agency as downgrade loomed

Treasury Department officials were in frequent contact with credit-rating agencies last year as they tried and failed to prevent the first-ever downgrade of U.S. debt, emails obtained by The Hill show.

The internal documents, acquired through a Freedom of Information Act request, show that Obama administration officials were in touch with Standard & Poor’s (S&P), Moody’s and other rating agencies in an effort to assuage doubts about the nation’s top-tier credit rating.

That campaign ultimately failed on Aug. 5, when S&P became the first and only rater to downgrade U.S. securities.

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On the day the downgrade was announced, Treasury and S&P traded a flurry of emails, the documents reveal. Matthew Rutherford, Treasury’s deputy assistant secretary for federal finance, received a draft copy of the decision at 1:42 p.m. from John Chambers, the chairman of S&P’s sovereign-ratings committee. 

“Matt Here is the draft ratings update. It hasn’t been fully edited yet, so there could be some small additional changes,” Chambers wrote.

Treasury officials scrambled to get in touch with S&P after receiving the downgrade document, the emails show. “We are trying to reach you all. Are you free to talk?” Rutherford wrote to Chambers at 2:50 p.m.

At 3:11 p.m., Rutherford emailed,  “ready when you are.”

Treasury officials pushed S&P to reconsider the decision, the emails suggest, by arguing the raters were using an incorrect budget “baseline” in calculating the nation’s future debt load.

Rutherford checked in with S&P’s Chambers again at 4:34 p.m., asking: “Hi guys: any updates?”

Chambers wrote back: “We’ll call in a moment. We’re double checking the baseline.” Rutherford responded that Treasury was “awaiting your call.”

The reference to a “baseline” is key, as Treasury would later blast S&P’s decision and argue it was based on faulty budget assumptions that added $2 trillion to projected discretionary spending.

Despite Treasury’s protests, S&P announced the downgrade at 8:13 p.m., citing an insufficient debt-limit deal and heightened brinksmanship in the Capitol.

S&P and Treasury declined to comment on the discussions that took place Aug. 5.

The emails reveal that the Obama administration put S&P in touch with leaders on Capitol Hill as the battle over the debt ceiling unfurled. One introduction was given to Rohit Kumar, the deputy chief of staff to Senate Minority Leader Mitch McConnell (R-Ky.).

“Dear Mr. Kumar I believe Matt Rutherford mentioned me to you. I chair the sovereign committee at Standard & Poor’s. Matt thought that you would be well placed to describe to S&P the possible sequencing of legislative measures in the coming few days,” Chambers wrote to Kumar on July 26, copying Rutherford on the email.

A McConnell spokesman said S&P “called to ask about the legislative process surrounding the debt ceiling and [Kumar] explained the Senate’s legislative process.” 

McConnell made a significant contribution to the final debt-ceiling agreement. It was his idea to have Congress parse the $2.4 trillion debt-limit increase into three tranches and give members of Congress the opportunity to vote to disapprove of each increase. 

Though it is not reflected in the emails, S&P was also put in touch with the office of Senate Majority Leader Harry Reid (D-Nev.), a Treasury official told The Hill.

The documents also show that S&P officials were on pins and needles before the downgrade was announced, at one point fearing House Minority Leader Nancy Pelosi (D-Calif.) had leaked news of an upcoming development.

On July 14, S&P decided to place the nation's credit rating on CreditWatch Negative, which meant it saw a 50-50 chance of a downgrade over the next three months. 

But hours before the announcement was made, John Piecuch, S&P’s communications director, wrote an email to Chambers and David Beers, then S&P’s global head of sovereign ratings, that said: “The news appears to have been leaked.” 

The email was sent after a reporter questioned S&P about a quote given by Pelosi at a press conference earlier that day. “I don’t know if Standard & Poor’s is public yet about our credit rating,” Pelosi said.

Beers responded: “Oh, dear. Our former House Speaker, no less … ”

A spokesman for Pelosi said the congresswoman didn’t leak any new information and was not aware of any new developments. Instead, she was referring to a Reuters story, headlined “S&P warns lawmakers on debt limit downgrade: aide,” which appeared about an hour before her press conference.

It is not clear why the Pelosi exchange was included in the government documents that were provided to The Hill. 

S&P was not the only credit rating agency communicating with Treasury during the debt-ceiling debate. All three major credit rating agencies were in close contact with Treasury officials at that time, the documents show.

On the afternoon of July 13, Steven Hess of Moody’s emailed Treasury’s Rutherford to give him a first look at a press release that would be released later in the day.

“Matt, just to remind you that this is highly confidential until it is published. If any information about this were to become public, we would have to release it immediately,” Hess wrote.

A Moody’s spokesman referred to a section of the agency’s Code of Professional Conduct, which states that it gives issuers the chance to review ratings decisions for factual errors or to provide additional information “where feasible and appropriate.”

Congress has taken an interest in the back-and-forth between Treasury officials and the ratings agencies.

On July 27 — less than a week before the downgrade — former S&P President Deven Sharma assured lawmakers that the agency typically provides advance notice of rating decisions to guard against factual errors.

“We believe that is an appropriate process because it allows [for] elimination of any errors that may occur,” he told lawmakers on a House Financial Services subcommittee.

Sharma was in charge of S&P at the time of his testimony, but stepped down in September.

Documents obtained by the Financial Services subcommittee indicated that S&P officials had met in person with several high-ranking Obama administration officials, including Treasury Secretary Timothy Geithner, before making a decision in April to assign a negative outlook on the U.S. credit rating.

That led to questions from Republican lawmakers about whether the administration influenced S&P’s announcement, which Sharma denied.

“The purpose of sharing the draft release is only if there is a factual error,” he said. “Once a rating committee decision is made, we proceed along those lines.”

— This story has been updated to clarify that S&P made an announcement about putting the U.S. on CreditWatch Negative around the time of Pelosi's statement.