MELISSA BLOCK, host: So how to explain that S&P decided to downgrade U.S. debt, while Moody's and Fitch have not? What calculations go into these decisions, anyway? Is it more art than science?
Roben Farzad is considering those questions for Bloomberg BusinessWeek and he joins me now. Roben, welcome back to the program.
ROBEN FARZAD: Melissa, how are you?
BLOCK: I'm okay, thanks. Is it mathematical formulas that lead to these credit ratings or are there other criteria that they're using as they make these decisions?
FARZAD: It's nominally mathematical. I mean, you know, there must be a rhyme or reason to it - this is ultimately the study of balance sheets and whether you have enough money coming in the door to pay the bills going out the door. But in this case, I mean, when these guys turn around and they're brought before Congress, time and again they say that it's above all else their constitutionally protected editorial opinion. So it's decidedly subjective.
BLOCK: And it's interesting because S&P's explanation on Friday was short on numbers. It was long on the subjective evaluations of the U.S. political process, what they called brinksmanship that they've been seeing.
FARZAD: It's at the intersection of where soft political analysis and, you know, where you guys are not getting along meets actual numbers. For example, if the Bush tax cuts are allowed to continue again, even after Obama extended them the first time around, that then supposes that, you know, they're not going to sunset and you're going to have a windfall of tax revenue coming in after they're over.
BLOCK: And it's interesting, too, 'cause if you look at the Moody's latest analysis - and, again, they have not downgraded the U.S. - they say our debt is not out of line with other Triple-A rated countries. The U.S. economy, they say, has high potential for rebounding and they point out the almighty status of the dollar. They're looking at this in a whole different way, it looks like.
FARZAD: Yeah, our economy is a beautiful Rorschach that way - you could just look at it in thousands of different ways. Moody's, in its statement in confirming the Triple-A rating, is saying that, look, in the end we are still the reserve currency. In fact, more so now that there's all this global volatility - you look at what's happening in Europe. We are that redoubt of safety the world over. And even after all this tomfoolery in Washington, our borrowing cost has been going down.
I mean, if anything, you'd think that would be punished with higher bond yields and these bond rating firms would have a case for taking our ratings down, but that's not happening.
BLOCK: Roben, what are the mechanics here - when a ratings agency makes a decision like this, how do they do it? Is it a committee? How many people are involved? Do they vote on it?
FARZAD: You know, we all like to wait downstairs by the building and wait for white smoke to emanate from the chimney.
(SOUNDBITE OF LAUGHTER)
FARZAD: But it doesn't happen that way. It is a committee that meets. They have specialties with sovereign debt, corporate debt. We know that they have committees that look at mortgage financing and they were off by years and by trillions of dollars. I mean, people seem to forget that and they come together...
BLOCK: Back in the financial crisis leading up to 2008.
FARZAD: That's right. That's right. They come together and then rut it up higher rungs in the corporate ladder. And ultimately, somebody signs off and you get that statement on a Friday afternoon.
BLOCK: Can you think of other examples of countries whose ratings have either been upgraded or downgraded and what history has shown about whether those ratings were justified?
FARZAD: They were somewhat timely, I think, in the late-'90s when you had the rolling emerging market crises, what with Malaysia and Thailand in 1997 and Russia in 1998. But those were pretty slow motion wrecks. I mean, you kind of knew that Russia wasn't necessarily going to be good for its money, that oil revenue was plummeting. So they had a lot of lead time to make somewhat timely calls on sovereign debt.
The United States is a whole different beast. It's orders of magnitude larger than any other economy out there. And the fact that this is happening four years into the financial crisis says a lot about their timeliness.
BLOCK: I'm kind of stumped by something I read from Fitch, the ratings agency Fitch. They said this - the long-term credit performance of the Triple-A rated versus AA-rated issuers is statistically negligible. So, Roben, if that's the case, why all the big fuss about this?
FARZAD: There is a big fuss because for whatever reason, even after the credit rating agencies got it wrong, a lot of fund managers - the majority of fund managers and bond fund managers, and pensions and institutions, universities - have it in their charter that they could only buy super clean, Triple-A rated debt. It's like buying a wedding ring, it has to be this size carats and it has to have 99.9 percent clarity.
In the grand scheme of things, people can't tell it apart from one that might be several notches down. But you want to buy the best of the best. And it's an element of diffusion of responsibility. It's the fact that it would too difficult for bond managers to go out there and do their own shoe leather research, and they end up relying - some would say too much so - on the ratings agencies.
BLOCK: Okay, Roben Farzad is a senior writer with Bloomberg BusinessWeek. Roben, thanks very much.
FARZAD: Thank you. Transcript provided by NPR, Copyright NPR.