What’s A ‘Significant Error’? Standard & Poor’s Says Leave It To Us

Just days after the Treasury Department criticized Standard & Poor’s for “a $2 trillion mistake” in the math it used to justify its credit downgrade of the United States, the ratings firm sent a letter to securities regulators urging them to keep some proposed regulations as vague as possible.

One area in which S&P had specific interest in keeping things vague? A provision that would require the firm to report “significant errors.” The letter was first noticed by Reuters, though you can see the letter for yourself [1] [PDF] on the Security and Exchange Commission’s website.

S&P “does not believe that the Commission should attempt to define the term ‘significant error,’ ” the firm wrote. Should it do so, the commission “would effectively be substituting its judgment for that of the (rating agency).” (Reuters notes that the other two of the three main ratings firms, Moody’s and Fitch, did not raise major concerns [2]about the proposed rule on errors.)

In the controversy over the U.S. downgrade, Treasury officials accused the firm of making a miscalculation that “undermined the economic justification [3] for S&P’s credit rating decision,” noting that after the mistake was pointed out, “S&P simply removed a prominent discussion of the economic justification from their document.”

According to the Wall Street Journal, however, S&P didn’t seem to agree on whether this mistake constituted a significant error [4]:

S&P officials acknowledged the error Treasury pointed out but didn't believe it was so significant. It was a technical error, though it could have serious implications.

“We have found our error correction policy has proven to be effective,” the company told the SEC. That policy requires [5] [PDF] the firm’s employees to “promptly report any material errors discovered” but essentially leaves it to the firm to define whether the error is significant enough to warrant disclosure or adjustment of ratings.

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