Govt. Goes After Firm After It Downgrades US Debt

Published May 15, 2012

Credit rating firm Egan-Jones cuts its rating on U.S. government debt to “AA” from “AA+” in April, with a negative watch. Barely one week later the Securities and Exchange Commission charged the firm and its founder with making material misrepresentations in 2008.

Egan-Jones cited a lack of progress in cutting the mounting federal debt as the reason for its downgrade.

“When debt-to-GDP exceeds 100 percent, a country’s financial flexibility becomes increasingly strained,” Managing Director Sean Egan wrote in his report on the downgrade. “For the first time since World War II, U.S. debt exceeds 100 percent.”

He added, “Obviously, the current course is not enhancing credit quality. Without some structural changes soon, restoring credit quality will become increasingly difficult.”

A few days later U.S. securities regulators charged Egan and his firm had made material misrepresentations to the agency in its 2008 application to rate asset-backed and government securities.

“This has nothing to do with our ratings. This has to do with paperwork and filings in connection with an application. There’s never been any question about our ratings,” Egan told CNBC.

He added, “The paperwork you can interpret in a number of different ways. I filled our part out as accurately as I possibly could. I don’t mind the scrutiny of it.”

Egan-Jones is the smallest credit rating agency approved by the federal government. It also differs from its much larger competitors in that its services are paid for by subscribers rather than by the issuers of the securities it rates.

Egan-Jones says its subscriber-pays model gives the firm more independence than the other rating agencies that are paid by the companies whose securities they rate.

— Steve Stanek