Obama Allies See ‘Tea Party Downgrade’ as \They Seek to Reassure Investors

The Obama administration sought to reassure global investors and push back against Standard & Poor’s first-ever downgrade of the nation’s credit rating while trying to pin responsibility on Tea Party Republicans.

With markets opening for the first time since S&P lowered the credit rating on U.S. debt to AA+ from AAA, Democrats and Republicans traded blame for the political standoff over the nation’s debt.

“This is essentially a Tea Party downgrade,” David Axelrod, President Barack Obama’s political strategist and former White House aide, said yesterday on the CBS program “Face the Nation.”

S&P’s downgrade followed the biggest weekly selloff in U.S. stocks in 32 months, with the S&P 500 Index (SPX) slumping 7.2 percent to its lowest level since November. Falling stock prices along with sluggish economic growth and an unemployment rate hovering above 9 percent are clouding Obama’s re-election prospects next year, and the fallout may hit members of Congress from both parties.

Investors seeking a haven amid concerns the global economic rebound is fading have bought Treasuries in recent weeks, even after S&P warned it may lower the U.S. rating. Yields on benchmark 10-year notes closed at 2.56 percent Aug. 5, before S&P announced its decision, down from 3.12 percent a month ago.

Treasury Market

Treasury 10-year futures were little changed in early Asian trading. Contracts for September delivery rose 1/32, or 31 cents per $1,000 face amount, to 127 2/32 as of 8:23 a.m. in Tokyo, according to data compiled by Bloomberg.

U.S. lawmakers need to come together as they did for a 1980s overhaul of Social Security, and compromise on the medium- term consolidation of the country’s fiscal position, said John Chambers, chairman of S&P’s sovereign debt committee.

“This is a problem that has to be addressed by the full spectrum of political parties,” he said in an interview on Bloomberg Television.

Two other ratings companies, Moody’s Investors Service and Fitch Ratings, affirmed their AAA credit ratings for the U.S. on Aug. 2, the day Obama signed a bill that ended the debt-ceiling impasse. Moody’s and Fitch both said downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens.

Greenspan’s View

Former Federal Reserve Chairman Alan Greenspan said U.S. government bonds are safe investments. “Very much so,” he said on NBC’s “Meet the Press” program. The S&P downgrade, which stemmed from the political clash over the debt limit, “hit a nerve that there’s something basically bad going on,” Greenspan said.

Greenspan said he expects stocks to continue their decline as markets open.

“Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said. “So the initial reaction in my judgment is going to be negative.”

Once regarded by some observers as the greatest central banker, Greenspan has seen his legacy tarnished since the U.S. subprime-mortgage market collapsed in 2007. Having run the Fed from 1987 to 2006, he said in October 2008 that a “flaw” in the ideology of free-market risk management he had espoused contributed to the “once-in-a-century” credit crisis.

Origin of Crisis

Former Fed Governor Edward Gramlich, who died in 2007, had urged Greenspan to strengthen bank oversight during the record 2004-06 mortgage boom. Brooksley Born, who chaired the Commodity Futures Trading Commission from 1996 to 1999, cited Greenspan as among those who pushed back at her effort to spur legislation to make over-the-counter derivatives more transparent. Greenspan also was widely interpreted to have endorsed Bush administration tax cuts, which have contributed to record fiscal deficits, in 2001 congressional testimony.

Equity futures sank, signaling the market may extend its worst slump since the bull market began in 2009, while oil slid as the loss of the U.S.’s top credit rating fueled concern the economic slowdown will worsen.

Futures on the Standard & Poor’s 500 Index lost 2 percent to 1,173.80 at 8:49 a.m. in Tokyo. The dollar dropped to as low as 74.85 Swiss centimes before trading at 76.23.

Blame Game

Republicans said Obama bore responsibility for the crisis over the nation’s long-term debt because he had failed to offer a plan to lead the country out of unsustainable budget deficits.

“He’s had a chance,” Senator Lindsey Graham of South Carolina said on “Face the Nation.” “We’re three years into this. And he’s failing. And it’s not the Tea Party’s fault.”

Obama received a briefing from Treasury Secretary Timothy F. Geithner and National Economic Council Director Gene Sperling when he returned to the White House yesterday from Camp David, the presidential retreat, according to an administration official who wasn’t authorized to speak publicly.

Still, there were no plans so far for Obama to address the S&P action himself, something his aides said would bolster the credibility of the ratings company, which the administration and its allies were trying to diminish throughout the weekend.

The Treasury Department said S&P made a $2 trillion error in calculating the government’s debt in the initial analysis it presented the government.

‘Wrong Conclusion’

Geithner said S&P “drew exactly the wrong conclusion” from the budget agreement reached between the administration and Congress.

“S&P has shown really terrible judgment and they’ve handled themselves very poorly,” Geithner said in the transcript of an interview with CNBC broadcast last night. “And they’ve shown a stunning lack of knowledge about basic U.S. fiscal budget math.”

Axelrod said S&P made “an egregious analytical error” in coming up with the rating and “ theirs was largely a political analysis.”

He and Geithner said there should be no concern on the part of investors. The U.S. “is still the safest place to put your money,” Axelrod said.

“There’s no risk the U.S. would never meet its obligations,” Geithner said. “We’ve got some challenges ahead of us, but we’ll be able to work with those challenges.”

Geithner’s Tenure

In another step to try to settle markets, the administration said yesterday that Geithner would remain in the job at least through the 2012 elections, following months of speculation over his future.

Republican presidential candidates jumped on Obama after the downgrade. Former Massachusetts Governor Mitt Romney, the frontrunner in most polls, said, “America’s creditworthiness just became the latest casualty” of Obama’s poor leadership.

Axelrod said it was the “strident voices” in the Republican Party who scuttled a possible deal between Obama and House Speaker John Boehner that would have made deeper cuts to the deficit.

“The blame game will be intense between the two parties,” said Darrell West, director of governance studies at the Washington-based Brookings Institution. “It is not clear who the political winner will be.”

A New York Times/CBS News poll last week found that voters by a 47-32 margin trusted Obama more than congressional Republicans to make the right decisions about the nation’s economy. The poll, taken Aug. 2 and 3, was conducted before the S&P downgrade.

Lost Rating

Five governments have gotten their AAA ratings back after losing it, and “it’s taken them between nine and 18 years to do so,” S&P’s Chambers said. “Usually, when you lose a AAA rating you don’t get it back right away.”

Nathan Gonzales, political editor of the Washington-based, nonpartisan Rothenberg Political Report, said Democrats will “blame the Tea Party for everything” heading into the 2012 election.

“But if the economy hasn’t turned around by next summer, President Obama has the most to lose,” he said.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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