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    By DAMIAN PALETTA, JEANNETTE NEUMANN, and CAROL E. LEE

    WASHINGTON?On Monday, Congress's non-partisan number cruncher released an 11-page report describing how the newly minted debt-ceiling deal would cut the deficit by at least $2.1 trillion. While congressional offices were busy studying the report, an official from the rating firm Standard & Poor's quietly called to ask for details of the underlying projections.

    Four days later, based in part on that discussion, the rating firm announced a decision to downgrade America's debt?an unprecedented event in U.S. history?a move that is as controversial as it is potentially damaging to financial markets.
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    * S&P Strips U.S. of Top Credit Rating

    The information S&P gathered that day led it to overestimate future deficits by $2 trillion, a fact the Obama administration has called a reckless mistake. That phone call wasn't the reason S&P cut America's debt rating. But it was part of a chain of events, including also a stock market plunge and an emergency Oval Office meeting, which could have serious and lasting consequences for America's standing in the world, the Obama presidency and the reputation of S&P.

    Now, the White House finds itself in a position not unlike Europe's debt-laden countries: squabbling in public with a rater whose decision it dislikes. S&P didn't take the Treasury Department's suggestion to take time in reconsidering the decision, and instead rewrote its written justification for the move.

    "The magnitude of their error and combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking," said White House National Economic Council Director Gene Sperling. "It smacked of an institution starting with a conclusion and shaping any arguments to fit it."

    S&P President Deven Sharma defended the firm's position Saturday in an interview, including the speed with which it put out the statement. "We believe that once we have a rating decision we must move forward and get it to the marketplace quickly," Mr. Sharma said. "It's important to the marketplace to let them have our point of view."

    S&P's decision lay in the wild, near-default experience the country had endured just days before.

    On July 31, the White House and congressional Republicans reached a deal to raise the $14.29 trillion debt ceiling and cut between $2.1 trillion and $2.4 trillion from the deficit over 10 years. The agreement fell short of the $4 trillion package some White House officials and congressional leaders had strived to achieve. But Republican resistance to tax increases and Democratic opposition to major health-care cuts ultimately torpedoed hopes for a larger deal.

    The scaled-back compromise reflected a desperate effort to reach a political consensus before Tuesday, when the government might have run out of cash to make payments on everything from its debt to Social Security. Ominously, the deal fell short of a $4 trillion package that S&P had warned would be necessary to preserve the U.S.'s AAA credit rating that it had held for seven decades.

    When the S&P called the Congressional Budget Office?Congress's number cruncher?it asked about the different projections, known as "baselines," that it uses to estimate the impact of policy decisions on future deficits. Estimating that government spending would grow at a higher rate of inflation would make deficits worse, for example. This seemingly innocent exchange would set the stage for a dramatic series of phone calls several days later.

    On Tuesday, President Barack Obama signed the debt-ceiling deal into law. The next day, Treasury Department assistant secretary for financial markets Mary Miller and other officials met with a team of S&P analysts to discuss the agreement.

    Treasury officials explained to members of the "credit team" from S&P how the deficit cuts and future spending reductions would work.

    Ms. Miller, a debt market expert and financial analyst who spent 26 years at T. Rowe Price Group Inc., is a key part of the White House's economic team even though she is relatively unknown outside of the administration. She helped delay a default on the U.S. debt for as long as possible during as talks dragged on and was recently nominated for a senior position at Treasury to reflect her rising stature.

    Her second-floor office is directly below that of Treasury Secretary Timothy Geithner, with a view overlooking the White House.

    The S&P team included sovereign debt chief, David T. Beers, known by some for his bushy mustache and others?particularly in the administration?for being tough-minded. When the 90-minute meeting ended, S&P told Treasury they would confer later in the week to decide the next step. With that, members of the S&P team flew back to New York.

    The downgrade clock began to tick.

    Administration officials had stewed for months that S&P had an itchy trigger finger gunning for a downgrade. In April, Mr. Beers and other S&P officials met with Treasury Secretary Geithner and others to press for details of the U.S.'s plans to cut deficits. S&P officials felt they had been overly transparent in how they viewed the fiscal problems facing the U.S. Other countries with AAA ratings, such as the U.K., had taken bold steps to reduce their deficit. The U.S. had not.

    On Thursday, concerns about global debt problems hammered financial markets, and the Dow Jones Industrial Average fell more than 500 points. Mr. Beers notified the Treasury Department that the "credit" committee would be meeting the next day.

    On Friday, the stock market opened up sharply on an unexpectedly strong jobs report, but rocketed south when rumors of a U.S. debt downgrade by S&P filtered through trading desks and newsrooms. At 9:48 a.m., the Dow Jones began a precipitous 150-point, eight-minute nosedive. Markets see-sawed all day, with S&P officials refusing to comment on their plans.

    What few knew at the time was that S&P officials had convened on a conference call Friday morning and meticulously walked through their view of the U.S.'s credit rating, a process they repeat for each of the 126 countries they review. Ultimately, they decided to downgrade the U.S.'s debt from AAA to AA+.

    At 1:15 p.m., they called Treasury Department officials to relay the news followed thirty minutes later by an emailed a copy of their draft press release. The announcement would be made public soon.

    The email jolted the administration. Mr. Geithner phoned White House chief of staff Bill Daley and White House National Economic Council Director Mr. Sperling and notified them of the downgrade. Messrs. Geithner and Sperling saw Mr. Obama in the Oval Office to deliver the news. Mr. Obama's reaction couldn't be learned, though it came amidst a series of tense calls with European leaders about the euro zone's debt crisis.

    At the Treasury building, a team of officials huddled in Ms. Miller's office to dissect the press release. They included Matthew Rutherford, a top Treasury brain who came to Washington from the Federal Reserve Bank of New York, Chris Meade, a top agency attorney, and John Bellows, whose ambiguous title -- acting assistant secretary for economic policy -- underplayed his importance as a key Geithner adviser and budget expert.

    Within minutes, Mr. Bellows noticed what Treasury viewed as a glaring mistake in S&P's decision: The rating firm had used a "baseline" that projected deficits running at a much faster rate than many analysts thought likely. In essence, they had used a CBO "alternative" scenario instead of the more standard outlook.

    Over five years, the deficit would be roughly $300 billion smaller using the standard outlook. Over 10 years, the gap would be closer to $2 trillion.

    Because Treasury officials believed they were being downgraded because the deficit-reduction deal was $2 trillion short, they thought this new revelation could upend S&P's formula.

    They relayed their findings to S&P, Mr. Geithner, and the White House. The monumental decision was now in limbo.

    S&P officials were jarred, and phoned a CBO analyst to confer. The firm immediately switched to the more conservative deficit forecast. Treasury officials urged them to delay any decision for several days and take more time to deliberate.

    A government official said the Treasury urged S&P to reconvene the "credit" committee in light of the glaring change. S&P agreed, and officials in North America and Europe dialed into another conference call to decide whether to reverse their decision.

    Treasury and White House officials waited nervously. Over the course of several hours, their mood would shift from disappointment, disgust, and finally disbelief.

    S&P officials decided that despite the new projections the downgrade was still deserved. But they shifted the focus of their justification. Instead of basing it primarily on the insufficient size of the deficit-reduction deal, they emphasized Washington's dysfunctional Washington political culture.

    S&P rewrote its press release to reflect this change.

    This "political settings," as it's known to S&P, didn't assign blame to either the White House or congressional Republicans. But S&P officials felt the political mess raised questions about whether any future deficit-reduction package of substance could be achieved. This would be vital, in their view, to deal with the aging U.S. population and health care costs that will outpace inflation in the next decade.

    Mr. Beers telephoned Treasury at 8 p.m. and said the downgrade was imminent. Treasury officials protested.

    Thirty minutes later, the historic press release ricocheted around the world.
    ?Laura Meckler contributed to this article.
 
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