Political heat at S&P for ratings downgrades?
S&P replaces president after U.S. downgrade
The board of directors of McGraw-Hill met Monday and voted to oust Deven Sharma as president of their Standard & Poor’s rating division. This forced resignation comes approximately three weeks after S&P downgraded the debt of the United States. Jon Stewart, in the clip above, jokes about political pressure brought to bear on the company by the U.S. government. I think he is spot on with his humor.
Last week the U.S. Department of Justice just happened to discuss publicly an investigation of S&P and the other major raters about ratings assigned before the financial crisis to mortgage-backed securities, even though this investigation has been ongoing since 2009. Why the sudden need to reiterate this publicly? S&P’s downgrade was a brave action. It’s a pity that Deven Sharma has to pay for it with his job. As I wrote previously:
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.
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.
I really hope the U.S. government had nothing to do with this sudden ouster of Sharma. Credit rating agencies must be rigorously regulated, but governments must stay out of the ratings process. If they do interfere, it is the worst kind of distortion in the functioning of markets which will, over time, further weaken investor confidence.
BTW: Chinese newspaper Xinhua calls for the reform of US credit rating agencies.
Prostitution in Vallejo increases post-bankruptcy
There was a fascinating story in Bloomberg yesterday about an increase in prostitutes in Vallejo, California after they cut 33% of their police force following their bankruptcy.
It turns out that apprehending prostitutes is labor-intensive:
Prostitution and drug dealing used to be fought by a crime- suppression unit of 12 officers and a sergeant, Nichelini said. Since it disbanded in 2010, arrests for solicitation have dropped from about 96 a year to about 24, he said.
The arrest rate “is very low because it’s labor intensive,” Nichelini said. “You have to have a minimum of five people to make the prostitution arrest, which is a misdemeanor and they’re out of jail within an hour.”
I’m not of the mind that prostitution is something that police need to spend all their time on, but law enforcement is one of the primary responsibilities of local government. The lesson of Vallejo and other squeezed municipalities is that there will be less of it. The chart above from the Bureau of Justice Statistics at the U.S. Department of Justice shows local governments are carrying the heaviest load in terms of paying for law enforcement.
The International Association of Chiefs of Police publishes data on police officer to population ratios. Data from this report shows that Vallejo is seriously understaffed given the ratio of police officers to population.
Citizen groups are trying to make up for a loss of police officers. Bloomberg reports that Vallejo has an extensive network of neighborhood watch groups:
Vallejo has 302 neighborhood-watch associations with 2,552 members, up from 10 groups with 60 people in 2009, said Tony Pearsall, executive director of the Fighting Back Partnership, a Vallejo-based nonprofit social-services group.
As muniland shrinks, we will see more of these adjustments and solutions. Vallejo is an extreme example, but reductions are happening everywhere. There will be less government. Let’s use what we have wisely.
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