Mystery surrounds details of S&P downgrade

WASHINGTON (CNNMoney) -- Little is known about key details that led Standard & Poor's to downgrade U.S. debt late Friday, despite its outsized repurcussions.

While the move knocking U.S. debt down a notch from the lofty AAA rating has exacerbated an already skittish stock market and drawn criticism from the White House, key details are a mystery.

S&P doesn't say who, exactly, made the decision at the company; what kind of weight they gave U.S. politics versus ability to pay; or to what extent they felt pressured to downgrade the United States in response to criticism of its downgrades of risky European nations.

Standard & Poor's is one of three major credit rating agencies -- along with Moody's and Fitch -- that make money by giving grades on how likely it believes that a nation, municpal government or company will pay off its debt.

However, the rating companies are unregulated, even as their ratings garner big-time consequences. And while S&P officials have talked about the "flavor of some of the assumptions," including their doubts about the ability of Congress and the White House to work together to cut deficits, they don't have to reveal details of their discussions.

During the financial crisis, these same agencies got hammered for their decision to give top grades to securities based on risky mortgages made to homeowners destined to default on their loans.

And while their grades to sovereign debt haven't been as tarnished as their grades to mortgage-backed securities, critics in both cases have questioned the greater significance for the markets.

"They're just information providers, although (the big three) have certainly attained substantial prominence as providers of information," said Lawrence White, an economics professor at the Stern School of Business at New York University. "They're not government agencies; they're not under the same kind of transparency requirements that a government agency would be under."

Two S&P top analysts, David Beers and John Chambers, may have played a key role, since they've been the public face of S&P's public relations' campaign to defend the downgrade of U.S. debt from AAA to AA+.

The decision was made by a panel of 5 to 9 people, according to a spokesman who didn't respond to requests about who was on the panel.

S&P President Deven Sharma told lawmakers at a House hearing two weeks ago that analysts involved in rating sovereign debt are in "regular ongoing dialogue" with Treasury officials. But Sharma said he had not spoken directly to Treasury Secretary Tim Geithner.

Chambers went into some details about what went into the decision, saying the "political settings," including the "debacle of raising of the debt ceiling," played a role. He also said that the U.S. fiscal situation, and S&P's assumption that the debt burden will grow under "any scenario," was the other big downgrade factor.

Beers said that other factors that S&P looks at when considering a grade remained unchanged, such as the risk associated with the strength of the dollar, U.S. liquidity of investments and even the economic structure and growth prospects.

One big difference between S&P and other credit rating agencies such as Moody's and Fitch, is the weight S&P gives to politics as a factor in a possible default, said Dan Alpert, managing director of Westwood Capital, an investment bank in New York. Other credit rating agencies base their ratings more on a nation's ability to pay, he added.

"This is a spanking to the U.S. Congress and the White House," Alpert said.

As a part of the Dodd-Frank financial reform law, Congress tried to deflate the significance of a credit rating agency's scores. Part of the reason the ratings are so watched is that U.S. law, as well as the laws of many other nations, require the rating agencies to grade certain financial products and debt to determine whether such investments are safe.

In Dodd-Frank, lawmakers ordered regulators to eliminate such reliance on credit rating agencies. But that effort has been slow going, regulators said at a recent hearing on Capitol Hill.

Even with the changes, the big three rating agencies will continue to play a major role in the U.S. financial system, although "it's possible there would be more information purveyors and the relative importance of S&P and Moody's could diminish, " White said.