Blog on the Run: Reloaded

Thursday, August 18, 2011 8:50 pm

Standard & Poor’s. Again.

Filed under: I want my money back. — Lex @ 8:50 pm
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I suggested last week that Yves Smith might be onto something in suggesting that Standard & Poor’s downgrade of U.S. debt might have been more political payback than anything having to do with the actual ability, or even the willingness, of the government to pay interest on its debt. As hypotheses go its only mildly conspiratorial by today’s standards, and it also comports with the behavior of the markets in the aftermath of the rating downgrade: People bought more Treasuries, driving the interest rate on them down.

Turns out that once again, we were, if anything, not paranoid enough:

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

My guess now? S&P knew word of this investigation was going to get out and so downgraded U.S. debt to try to make this news look like payback for the downgrade. Heck, if I worked for S&P I might well be able to put some insinuations about “Chicago-style machine politics” to good use.

Friday, August 12, 2011 8:37 pm

If we HAD high inflation and U.S. debt wasn’t downgraded THEN, why is it being downgraded NOW?

Filed under: Evil,I want my money back. — Lex @ 8:37 pm
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In the late 1970s, the U.S. had a big problem with inflation — not as big as, say, Argentina, or post-World War I Germany, but by U.S. standards, huge. Inflation topped 11% in 1979.

Did Standard & Poor’s and the other ratings agencies downgrade the federal government’s debt back then? Why, no, they did not. That debt remained AAA grade, just as it did up until the other day.

But … but … but … the reason Standard & Poor’s downgraded U.S. debt the other day was because they were afraid the national debt was getting out of control and would lead to inflation, right?

Well, that’s what S&P implied, and it’s certainly what the national media and economically illiterate right-wing nutjobs wanted us to think. However, the fact of the matter is that 5-year Treasury notes are currently paying negative real interest rates. It is literally cheaper right now, taking (lack of) inflation into account, for the government to borrow money for five years to do stuff than to pay cash for that same stuff. And that’s the markets’ doing, not the government’s. So, clearly, bond markets do not perceive inflation to be a near-term or medium-term threat.

So why did S&P downgrade U.S. debt? Yves Smith offers a plausible explanation: payback:

The S&P downgrade looks to be politically motivated. The President had several routes by which he could have circumvented the debt ceiling restriction and almost certainly would have used one of them if the debt ceiling talks had dragged on so long that it became difficult to make interest payments out of tax receipts. McGraw Hill, which owns S&P, is headed by Terry McGraw, a prominent figure in the Business Roundtable, which has stated that it wants Social Security privatized. S&P has used its muscle to its advantage in the past, such as a state effort in Georgia in the early 2000s which would have reined in predatory lending and in turn reduced the issuance of private label mortgage backed securities. Rating them was a very profitable business for all the rating agencies. S&P torpedoed that initiative by refusing to rate bonds with Georgia loans in them. That forced Georgia to back down and killed other state efforts underway. Had these laws been in place, it is almost certain the subprime crisis would not have risen to a global-economy-wrecking event.

We now live in an era in which some of our most powerful institutions are perfectly willing to blow up the economy for short-term gain and the opportunity to place bets on the ensuing disaster. The rule of law, if you are big enough and rich enough, has gone by the boards; the umpires, to use Chief Justice John Roberts’s metaphor from his perjured confirmation testimony, have gone beyond calling balls and strikes to taking a side.

That side is not the president’s. The greater problem is that unless you are fabulously wealthy, it is not yours, either.

Thursday, January 13, 2011 8:50 pm

Consider the source

Filed under: I want my money back. — Lex @ 8:50 pm
Tags: , ,

S&P and Moody’s: Reduce U.S. debt or we’ll reduce your bond ratings.

Oh, I have no doubt they’ll do it. I just don’t understand why anyone would care what they think, inasmuch as they told us that huge piles of liar loans were AAA investments.

I also don’t understand why everyone who works for them above the rank of office manager isn’t in prison, but that’s a whole ‘nother subject.

Thursday, May 6, 2010 12:10 am

Slightly unrigging a rigged game

Filed under: I want my money back. — Lex @ 12:10 am
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Sen. Al Franken wants the SEC to set up a panel that would assign securities to a ratings agency to be rated, rather than letting the investment banks that issue those securities go ratings-shopping, as happens now. It ain’t perfect, but people who know a lot more about this than I do, like economist Dean Baker, say it would work.

Sunday, November 22, 2009 10:10 am

His judgment cometh, and that right early not a damn second too soon

We wouldn’t be in the situation we’re in now without the credit-rating agencies — Standard & Poor’s, Moody’s and Fitch. And people are beginning to figure that out:

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Remember, we’re dealing with a setup in which companies pay the ratings agencies to rate their stuff. No conflict of interest there.

And I’d like to think that this will be a slam dunk for the plaintiffs. But the system is so rigged that I suspect it won’t. Hell, if a TV station can’t be held liable for broadcasting false news, what makes you think a bankster is going to have to pay a dime for screwing people?

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