Rater bashing

August 10, 2011

I may be the first blogger to defend the rating agencies this week. After I studied them and helped shape the rules which regulate them, I think this is a watershed moment. Standard & Poor’s took one of the bravest actions that I’ve ever seen a rater take when it downgraded the United States one notch. Furthermore, this marks a new beginning for accurate credit analysis and truth in fixed-income markets. Keep speaking the truth, S&P. Stand up and sing it out!

It’s been somewhat disconcerting to see the river of recent articles bashing the credit rating agencies after the downgrade. Raters aren’t perfect — after all they did prostitute themselves with their structured finance ratings that lead up to the August 2007 crash. For that, they deserve criticism. Strict new rules have been put in place since then that regulate them. Regardless, almost every article about the U.S. downgrade huffs and puffs about the legitimacy and fairness of a private company assigning an opinion about the creditworthiness of a sovereign entity.

S&P initially assigned their top rating of AAA to the United States in 1941 and had left it unchanged until last Friday. S&P is not paid for rating the United States. Even so, the decision to downgrade has been mocked as anti-American and uninformed. Unfortunately almost every person writing about this action couldn’t tell you how ratings are created, what they are used for or how raters are regulated. The lack of understanding is stunning.

The truth is that the U.S. deserved to be downgraded because the remedy to solve our fiscal problems is being blocked by political extremism. This is an indication of a governance breakdown and does nothing to assure those who lend us money that there is “full faith and credit” backing our debt and a rock solid intention to repay what we have borrowed.

Here is a video of one of the most powerful men in Congress, Representative Barney Frank, saying in July that he feared Congress could default on the debt. Then Congress and the administration took us to the brink of default and finally passed legislation at the 11th hour. What sane rater would look this and not question our willingness to pay? Add to those theatrics a debt load almost equal to GDP, plus massive liabilities for Medicare, Medicaid and war spending. It’s a picture of fiscal wantonness. No one is keeping our house in order. Standard & Poor’s just pointed to the emperor and said, “You have no clothes!”

Fixed-income investors value certainty above all else, and the recent debt debate blew their confidence in the U.S. as a steady, reliable borrower. Peter Fisher, who currently heads global fixed income at Blackrock, the world’s largest asset manager, says in the video above that he was giving speeches 8 years ago as a former assistant secretary of the Treasury about the poor fiscal condition of the U.S. In the video he explains numerous times how Blackrock positioned itself ahead of the downgrade to take advantage of it. There was no surprise at Blackrock. The only market surprise about the downgrade was that S&P had the strength to face off the world’s largest borrower and tell them they are no longer as strong and good-looking as they once were.

I’ll write another day about the regulation of credit ratings agencies. It will probably surprise most Muniland readers how well the rules allow them to be overseen by the SEC. The bad news is that although there are excellent rules Congress is strangling the SEC for funds. People’s anger should be directed at this Congress for starving our regulators when they should have all the ammunition they need to police all participants in the financial markets, including the raters. Then Wall Street’s overseer would have the resources to send some deputies around to make sure the raters have kept their houses in order.

Rater-bashing is a waste of time. Credit rating agencies will be powerful institutions as long as we have credit markets. Someone needs to rate large sovereign borrowers and tiny municipalities. It’s an industry with a long history in financial markets and a key role in developing opinions about creditworthiness. Bashing a rater for truth-telling is like punishing a child for speaking an unpleasant truth. It creates incentive to shade the truth, and the harsh truth is what is needed now more than ever.

Standard & Poor’s:  Form NRSRO for 2011


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S&P controversy fuels demands for ratings reforms

http://www.reuters.com/article/2011/08/1 1/us-financial-regulation-creditraters-i dUSTRE77A03S20110811

Posted by Cate_Long | Report as abusive

if they are front running material information
to set up a short attack (re the bank meeting)
…. that’s jail time

same as if you or i got the midnight phone call from a
pal in a gold junior about a bad drill result

… sorry pal thems the rules

Posted by maltadefender | Report as abusive

“Fixed-income investors value certainty above all else, and the recent debt debate blew their confidence in the U.S. as a steady, reliable borrower.”

This is the crux of the matter. If investors’ confidence in US debt was blown, why have they rewarded the US with lower interest rates?

I agree with you that there has been a lot of unnecessary hot air spilled over this, but bloviation is what bloggers do. Its really neither here nor there.

Posted by dude. | Report as abusive

“after all they did prostitute themselves with their structured finance ratings that lead up to the August 2007 crash. For that, they deserve criticism.” Well said Mr Muniland. That is the reason why the markets lost faith in rating agencies. It is the political mayhem that brought the debt ceiling and deficit reduction into limelight. Extending the debt limit is a routine process and public were not aware much of it until this July. Only US political stalwarts are to be blamed for this tragedy.

Posted by Muthia | Report as abusive

It is noteworthy to see that during the decline, S&P had no problem, but then they started demanding that austerity measures against the poorest Americans be implemented, and when they did not get their way, they moved to this attempt at blackmail. A look at recent history reveals the truth of this tactic.

Posted by aligatorhardt | Report as abusive

[…] raters to monitor and disclose conflicts of interests and make their level of accuracy public.  I said in a post yesterday that a lot of fuss arose because the role of raters in financial markets, their practices and how […]

Posted by Are raters accurate? | MuniLand | Report as abusive

Alligatorhardt may be on to something here.

1. S&P should have done the downgrade years ago. Agreed.
Then why did it do so now? A different administration? They mentioned political will of Congress in their report. Why? Raising the debt ceiling was a normal exercise until it became politicized. Now S&P downgrades the US credit rating. My prediction is that it won’t hurt Obama at all, after they downgraded Japan’s credit rating in 2000, more investors bought Japanese gvt bonds because they were safe. The same will occur with America, even if S&P lowers their rating on the Treasuries as well. See something political here? And the other rating agencies like Moodys make zero changes why is that? (Sure different criteria is the official reason, but c’mon man lets look at the big picture here).

2. Congress sends up a huge red flag when it refuses to adequately fund the SEC. I agree with the writer of the article on this point as well. It leads one to believe rightly or wrongly that Congress is bought off by the bankster lobby.(For the record I believe most are bought off including Frank btw). Of course the fact that they have dozens of former Wall Streeters in the Treasury Dept, the Fed Reserve and the SEC also helps one to conclude that Congress does not want to do anything about the fraud that was perpetrated against the American people. Fact of the matter is, they won’t go against their benefactors.

3. S&P deserves “criticism” for their actions prior to the 2008 meltdown of the markets? Eh hum, excuse me, they actually deserve more than that. They gave AAA ratings to some of the most riskiest investments on Wall Street. They and the banksters who perpetrated this fraud should be in jail. Just like how some bankers went to jail over the S&L crisis. Why is this any different? Why coddle S&P?

4. Either way S&P loses in this game. They don’t do anything to credit ratings and the countries/banks fail, they lose. They reduce credit ratings and people will accuse them of collusion with banksters who want things to go to H in a hand basket so that banksters can then pick off assets of countries like Greece.

With Congress not wanting to get to the root of the problem, either via the SEC or with the debt(most of which was caused by S&P and the Banksters) or Glass Steagall(no one spells this name right btw), or any other type of legislation. The banksters will use S&P to lower everyone’s credit ratings, then force countries to their knees to then accumulate assets for the New World Order. And usher us into a one world currency scenario.

Its a Ponzi scheme that will eventually crash. I just hope some country in Europe will stand up to these pirates and not allow this to happen. Maybe France? But the stage is now set, countries in Europe will soon start falling over one another like dominoes and the banksters will be there like buzzards to pick the meat off the bones.

Forget about the US, the politicians from both sides have too much skin from the banksters in the game. Nothing will happen, and that’s by design. We can print our own money. But once hyperinflation sets in, Bernake will have to stop that practice, then he will be out of options, and the whole Ponzi scheme will collapse.

S&P is just a small player in this game. Since they along with the banksters, helped create this mess, I have no reason not to believe that they are working with them again. E.g,if a convicted felon were to come to your door and say, “I was convicted for lying to people about the quality of the investments I supported, and b/c of this people lost millions, but I want you to really believe what I say about this particular investment this time”, would YOU believe him?
For that reason if we do not criticize S&P it means that they will fall into obscurity and maybe people will not remember their role in all of this mess. That would be a sad and tragic mistake.

So while what they did was the correct thing, even “brave”, all evidence points to them working with the banksters, and I don’t believe that they do anything for the benefit of investors. Their past does not MERIT my trust. PERIOD.
To the writer of this article: Sir, with all due respect, you have helped create a monster that is now being manipulated to send the US and Europe into a depression. I hope Europe sees the handwriting on the wall and stops CDS and gvt bond shorting before its too late.

Posted by Independent007 | Report as abusive

[…] a positive take on the rating agencies read Cate Long’s “Rate Bashing” on Reuters […]

Posted by The US downgrade has benefited Treasuries but sent France and French banks reeling | Ian Fraser | Report as abusive

I apologize to Ms. Long for referring to her as a Sir instead of Ma’am, unfortunately I looked at the you tube video and saw a gentleman there and assumed. Once again accept my apologies…

Posted by Independent007 | Report as abusive

Nothing to apologize for. Thanks for commenting on my blog.

Posted by Cate Long | Report as abusive

[…] headlines about bankruptcy cases in Jefferson County, Alabama and Central Falls, Rhode Island; and Standard & Poor’s downgraded the debt of the United States with potential effects on the borrowing ability of states and municipalities. […]

Posted by Smooth sailing in muniland | MuniLand | Report as abusive