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Standard & Poor’s removal of the AAA credit rating the United States has held for 70 years has generated a lot of finger pointing at and within the federal government. U.S. Treasury Secretary Timothy Geithner said the agency showed “terrible judgment” and a “stunning lack of knowledge” about what it takes to develop the federal budget. The agency stood by its rating over the weekend, and some members of Congress have called for Geithner’s removal, citing his relentless push of failed economic policies. Cornelius Hurley, director of Boston University’s Center for Finance, Law & Policy, says at the end of the day what concerns any investor is whether or not they’re going to get their money, not what led to the downgrade. From 1981-89, Hurley was general counsel of Shawmut National Corporation, a Boston financial institution. He says that the recent debate in Congress over whether or not the U.S. would honor its debt would never be acceptable in any corporate setting. “Investors in these instruments—whether they’re short-term or long-term—go right to the bottom line: ‘Am I going to be paid?’ ” Hurley called the recent debate in Washington traumatic. “ The question was whether we were going to default on our debt,” he says. “That’s a debate we shouldn’t have even been having.” CorpCounsel.com spoke with Hurley on Monday about what whether the downgrade was justified and what the new AA+ rating means for big corporations. CorpCounsel: Was the downgrade justified? Cornelius Hurley: I think the S&P downgrade was a long time coming. They announced in April that the U.S. was on watch, so it really shouldn’t have taken anybody by surprise when it occurred. When the downgrade warning was issued in April, that was months before the debt-ceiling debacle that we went through. So I’m a little surprised by the Administration’s disarray in responding to it. CC: Back in April, Secretary Geithner said we didn’t have anything to worry about in terms of a downgrading risk. CH: If he said that, he was wrong. He’s been wrong about a lot of things. How we got to where we are now is so tragic because it was so unnecessary. And there is a lot to the political rhetoric that is in large measure attributable to one particular party being willing to question whether the U.S. was going to pay off its debt obligations. That’s just unheard of. We never should have gotten to that point. CC: Why was the credit rating downgraded now, for the first time in 70 years? CH: It’s partly a political judgment on their part, as to the atmosphere in Washington and how we’re going to handle our debt issues going forward. Some might argue that it’s not S&P’s-or any rating agency’s-place to make such judgments. However, when the political climate clearly impacts the willingness of the issuer to service and pay off its debt, then I think they were justified in taking that into account. CC: Are there any positive notes in the report? CH: There is, built into their outlook section. They say that notwithstanding the negative outlook for U.S. debt—if, for example, the debt committee (which is slated to issue a report by November 23) exceeds expectations or if other events indicate that there will be a larger reduction in the debt or if the Bush tax cuts for the wealthy are not extended—-then that negative outlook might be ameliorated. If I were advising Secretary Geithner, I would urge him to focus in like a laser on that more positive aspect of the report, rather than the fact that it’s the first downgrade in the 70-year history of issuing these kinds of reports. CC: And not focusing on the fact that S&P’s also said further downgrades are possible? CH: Right. Well, they are possible. And they’re possible not just by S&P. Moody’s has us on watch for a negative downgrade, and Fitch has indicated that it’s watching the November 23 report by the “Super Congress” committee. So it’s not just S&P; we have Moody’s and Fitch in the wings as well. CC: Critics are saying that countries that are in much worse shape financially speaking than the U.S. now have better credit ratings. Is that even relevant? CH: [The dollar is] the world’s reserve currency. Central banks don’t have much choice but to invest in U.S. instruments. That sets us apart from many of the others. But I think it was an inflection point, a shot across the bow, and a comment on our political process. CC: What’s the outlook for big companies? CH: I don’t think that this action is really going to have that profound an impact. It is a profound moment in history; but I think in terms of what big companies would have achieved or not achieved prior or after, it’s not that significant a deal. The cost of funds is not going to be that much greater in the short term. Over the longer term, we might be talking about a different scenario. But in the short term, I think it’s pretty much steady as she goes. In equities, the market was down over 400 points last I looked. It could end over 400, the way things are so volatile now. CC: What can in-house lawyers do to potentially ease the pain? CH: I think they’re going to be called upon to look at all of their debt instruments. And if you’re in a bank or a financial institution, you have to keep your eye on the regulators, who very kindly issued guidance on Friday after the downgrade that said that capital levels would not be influenced by this. Over the long term, who knows? If you’re advising pension funds or endowments that have criteria for downgrades, it’s often said that one downgrade is tolerable, but downgrades by two rating agencies can have profound effects. If one or both of [Moody's and Fitch] were to downgrade, that could have significant impact. CC: What advice do you have for companies moving forward? CH: Keeping up on your debt instruments and your collateral agreements are always good. But in these fluid times, when the rules of the road are not what we have grown up thinking they were, vigilance is more important than ever.

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