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Credit Rating Agencies and Section Four

Gerard Magliocca

Gerard N. Magliocca is the Samuel R. Rosen Professor at the Indiana University Robert H. McKinney School of Law. Professor Magliocca is the author of three books and over twenty articles on constitutional law and intellectual property. He received his undergraduate degree from Stanford, his law degree from Yale, and joined the faculty after two years as an attorney at Covington and Burling and one year as a law clerk for Judge Guido Calabresi on the United States Court of Appeals for the Second Circuit. Professor Magliocca has received the Best New Professor Award and the Black Cane (Most Outstanding Professor) from the student body, and in 2008 held the Fulbright-Dow Distinguished Research Chair of the Roosevelt Study Center in Middelburg, The Netherlands. He was elected to the American Law Institute (ALI) in 2013.

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5 Responses

  1. Larry Rosenthal says:

    I am afraid that I do not find the question all that difficult. The Fourteenth Amendment says: “The validity of the public debt of the United States, authorized by law . . . shall not be questioned.” When a rating agency downgrades a bond, it is not questioning the validity of a debt (unless it is a very extreme downgrade), but rather giving advice to investors about the relative rate of return they should demand for buying a bond. To be sure, if Congress were to repudiate the debt that has been “authorized by law” under the current debt ceiling, that would reduce the rating to the point where the rating would itself be questioning the validity of the national debt, but no one is talking about doing that. In any event, in such a case you wouldn’t need the effect of congressional action on treasury bond ratings to make out a constitutional claim (if you were a bondholder prepared to sue); you would need no more than the congressional repudiation of debt that had been “authorized by law” when incurred.

    In any event, what those in Congress prepared to vote against any increase in the debt ceiling are doing is not questioning the validity of the debt incurred within the current ceiling and therefore “authorized by law,” but rather ordering the executive not to incur further debt — a matter within the scope of congressional power under Article I. This does not question the validity of the debt that has been “authorized by law” — after all, there is plenty of revenue still coming in to service existing debt. Even a default does not “question the validity” of a debt — it just gives the creditor the right to seek a remedy for the default.

    Or, look at it from the other direction. If the Fourteenth Amendment means that one cannot take action that reduces the rating of treasury bonds, since the relevant Clause of the Fourteenth Amendment is written in the passive voice and does not purport to bind only the government, doesn’t that mean that the Fourteenth Amendment forbids the rating aqencies from downgrading treasury bonds? That is the logical conclusion of this implausible argument, is it not?

    Larry Rosenthal
    Chapman University School of Law

  2. Gerard Magliocca says:

    I think I agree with this. The only thing that puzzles me is that Perry talked about the fact that Congress could not devalue our bonds. Now in that case the devaluation was direct (the specific gold content of the dollar was reduced). So what if Congress devalues Treasuries in some more indirect way?

    Now you could say at least two things about this. One is that a downgrade is not sufficient–it must be a substantial downgrade. (That is more or less what you said.) Another is that any thought that an indirect devaluation would be a constitutional violation opens a host of unmanageable questions that would get courts involved in fiscal and monetary policy (not to mention causation issues).

    So in the end I guess the best reading of Section Four is still that existing bonds must be honored in full–nothing more. That was my original position. I’m just trying to test its soundness.

  3. PrometheeFeu says:

    The rating is explicitly an evaluation of the chance that the security will default. I would say that lowering the rating is definitely questioning “the validity of the public debt of the United States”. However, any attempt to invoke that argument to prohibit a downgrade would be self-destructive.

  4. Logan says:

    Denmark also has a debt ceiling but it’s high enough to where raising it isn’t an issue.

  5. willyrave says:

    The problem of debt is now quite serious and it should be solved as sooner as possible. The activity of banks, credit unions and companies like http://britainloan.co.uk/ should be restricted. And of course new solutions for financial system should be found.

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