Et tu, S&P

August 6, 2011

By Matthew Goldstein

A few weeks ago S&P telegraphed that it would soon strip the U.S. of its vaunted Triple A rating and downgrade the government’s debt by a slight notch to AA+. And Friday night, the major credit rating did just as it telegraphed.

For the moment, let’s not debate whether S&P is engaging in politics, or should even be in the business of rating the debt of countries. The latter issue, however, is something that our nation’s political leaders and regulators may want to consider at some point.

But for right now, it’s worth noting that over the past decade or so, S&P has moved on downgrading corporate debt and esoteric securities as if it was still operating in the days of the telegraph.

Remember, Enron and Worldcom.

And who can forget the big role credit rating agencies like S&P played in allowing Wall Street banks to market subprime-backed CDOs as Triple A securities. In many ways, the rating agencies were Wall Street’s enablers and bought into the fiction that securities built from crappy mortgages would continue to payout because a national crash in housing prices was something unthinkable. Or, at least, something the rating agencies never seemed to consider throwing into their magic default models.

Additionally, S&P was the only major credit rating agency to slap a rating–an A rating–on ACA Capital. Don’t remember ACA Capital? Well before AIG took the lead in insuring flawed CDOs and other mortgage-backed securities, ACA Capital was Wall Street’s go to shop for guaranteeing exotic securities. ACA could only do this because of the A rating it had from S&P.

In the early days of the financial crisis, ACA Capital went bust. It’s collapse caused some write-downs for Wall Street banks and was a harbinger of things to come for AIG, but it was quickly forgotten. That is until last year, when the Securities and Exchange Commission sued Goldman Sachs over the now notorious Abacus CDO deal. And lo and behold, the tiny insurer was right there in the mix having guaranteed a portion of the deal and helped select some of the iffy mortgage-backed securities for the CDO.

Something to think about as you mull S&P’s actions with regard to U.S. Treasuries.

Update: As a reader points out below, the end for ACA Capital came when S&P downgraded it. But as you’ll see from a story I did in November 2007 for old BusinessWeek, even S&P was late in the game on that downgrade. Full disclosure: In 2007 BusinessWeek was still owned by McGraw Hill, the parent of S&P.


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Wasn’t it the same S&P that *down*graded ACA Capital, before it went bust and very much causing it to go bust? They shouldn’t have had an A rating in the first place though…

Posted by tommycarstensen | Report as abusive

I’m puzzled that serious investors still give any credence or consideration whatsoever to the posturings of rating agencies. Their credibility was shot to bits in 2008 when their collective, egg-covered faces emerged from the wreckage of the sub-prime debacle. They pontificate on the credit-worthiness of nations around the globe yet failed to get their own basis sums right when it really counted.

The sooner governments act in unison to put a spanner in the works of these incompetent clowns the better. There has to be a better way to weigh up a country’s credit worthiness without the intervention of organisations with such a lousy track record and the possibility of vested interests being a consideration in their reports.

Posted by Hewson | Report as abusive

ACA was the portfolio selection agent on ABACUS, no? As such they had the ability and duty to perform due diligence on every security that went into the reference portfolio. Either they did & were convinced their performance would be fine, or they didn’t and they failed in their fiduciary duty.

Also, and more importantly, the way Ratings Agencies rate sovereign debt (and corporate) is much different than the way they rate structured products. Comparing their failures in structured finance to this recent sovereign downgrade is not really a comparison worth making at all.

Posted by StoneStAdvisors | Report as abusive

This is absolute nonsense. At least S and P have learned from their earlier mistakes and are now doing the right thing. It would be great if the politicians, bankers and other assorted “experts” would do the same thing

Posted by akleinschmidt | Report as abusive

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Posted by Et tu, S&P | New Finance Lab | Report as abusive