Tuesday, August 9, 2011

Standard and Poor's Lacks All Credibility

On Friday, August 5, 2011, Standard & Poor’s downgraded U.S. sovereign currency from AAA to AA+. This despite a $2 trillion error it made when submitting its decision to the White House and the reason it gave for the downgrade:

In its announcement Friday night, S.& P. cited the political gridlock in Washington during the debt limit debate as a main reason for its decision. “The gulf between the political parties,” S.& P. said, had reduced its confidence in the government’s ability to manage its finances.

The other two major credit rating agencies, Fitch and Moody’s, did not downgrade the currency.

Not only did S & P’s move appear to be basically political as opposed to a determination made on sound financial ground, it also seems to have leaked information to selected hedge funds before it made its downgrade public in order to curry favor and possibly offer a chance to the funds to make insider bets on the dollar.

It’s amazing that anyone takes the credit ratings agencies seriously in the wake of securitization. Back in 2008, their triple-A ratings of subprime mortgage-backed securities and collateralized debt obligations were downgraded very quickly from triple-A to triple-C, sometimes within a few weeks. Lehman Brothers was rated triple-A a month before it went bankrupt.

The credit rating agencies were a huge part of the 2008 collapse. The reason was obvious: they were paid by the bond issuers. That’s where their loyalty was, not with investors. If an issuer (like Goldman Sachs) didn’t like Moody’s ratings on a RMBS stuffed with lousy mortgages, it’d walk across the street to S & P’s to get a better one.

But Standard & Poor’s, just like every entity in the daisy chain of securitization, wasn’t held accountable for its conflicts of interest. Despite its selfish, politicized motives, the mistakes it made with simple arithmetic, its obscure methodology which has proven so damaging to investors in the past, it’s still taken seriously by the marketplace.

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