Et tu, S&P
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.