On the S&P and Other Ratings Agencies

Pssst… did you hear? Standard & Poor (S&P) downgraded the US credit rating from the highest AAA to one notch down at AA+. Let’s remember what these guys are famous for. The ratings agencies missed Enron a decade ago – they didn’t reduce Enron from investment grade to junk until days before they shut down. Then they missed the Worldcom accounting scandal and the Global Crossing meltdown, marking them investment grade months before bankruptcy. Then they missed Bear Stearns, only cutting their rating one business day before they never opened again. Oh, and all those mortgage-backed securities rated AAA when they were stinking piles of poo.

Now, this doesn’t mean that the S&P is necessarily wrong. I just smell a ton of politics, and I hate politics. Also, how often have they sounded an alarm that actually helped small investors? As in “Watch out, you thought this was safe but it really isn’t! Look what we figured out with our in-depth analysis!” As opposed to “Yup, we read a newspaper last week.”

Comments

  1. Money Beagle says:

    I wonder how many bigwigs at the S&P shorted the market before they announced this. Sorry, but this screams of fraud!

  2. Glad to see I wasn’t the only one thinking this was politically motivated. I too hate politics, especially when it ends up hurting innocent bystanders.

  3. Couldn’t agree more with the “we read the paper last week” line. I’m an economist, and it just seems SO ridiculous to me that S&P’s official stance is that US Treasuries are now riskier than Johnson & Johnson corporate bonds… yeah right.

    Did you notice their initial calculation used Real (inflation adjusted) GDP, but unadjusted government debt, and then said “look the debt to GDP ratio shoots up like crazy!”. Treasury called them out, and they fixed their $2 trillion mistake… and retrofitted their rationale for the downgrade, saying political paralysis was the issue at hand. I think they downgraded the US to save face.

  4. hawks5999 says:

    @GregK “I’m an economist” – way to ruin your credibility :)

    Yeah, this downgrade is not worth the paper the $2 Trillion mistake was written on. Still I hope they don’t follow their pattern with Bear Stearns (downgrade the day before BS shut down).

  5. junkgrouch says:

    So based on your examples of Enron, WorldCom, Bear Stearns, doesn’t that mean that the US will declare bankruptcy soon?

  6. S&P warned the US back in April so it’s not an unexpected move. But the most important thing to note is that S&P said over the weekend that the downgrade was related to the political environment in the US. Now, I don’t know if S&P should consider the political paralysis in their review, but it is the damed truth that this Congress has absolutely no plan or the political will to fix this country’s finances. That’s the truth with or without the downgrade.

  7. The Oracle of Omaha has it right — the US should be rated “quadruple-A”

    http://www.bloomberg.com/news/2011-08-08/s-p-seen-surrendering-to-tea-party-at-expense-of-u-s-taxpayer.html

  8. Hah, no the real trend is that S&P downgrades are usually purely reactionary, and not a result of their superior credit monitoring service. It’s not necessarily surprising with all of the political posturing up to August 2nd that one might question the repayment willingness of the US a little bit. But was it worth a downgrade from AAA to AA+? Did such a downgrade actually help anyone?

  9. I think it helped people inasmuch as it brought to light the severity of the financial mess the government is in. The debt ratio is creeping up, very few in Washington seem serious about reducing it, and we are at a higher risk of default as a result. The debt ceiling serves no purpose if every time it is reached, it is raised.

  10. spot on

  11. Well guess I better stop investing in those unsafe I-Bonds and throw that money into mortgage-backed securities.

    @Jonathan
    Hey, that downgrade helped me! The market’s dropped several percent while people go crazy. This means I get to buy things cheaper with my new Tradeking account. :)

  12. Being a novice at investing, after reading and researching, I invested 2000 in the beginning of this year by buying S and P 500 for around 129 a share into a sharebuilder 401K. I lost half of it already…I don’t want to lose the rest. What should I do? What are my options. Please advise. Thanks

  13. s&p has been in business for 125 years. they’ve gotten a few right over that time. what ratings agency got enron, global crossing, etc right? did the sec even have a clue? its hard to see through outright fraud.

    the usa deserved what it got, and it took a lot of courage for s&p to cut the usa’s rating to aa+, which is probably generous given the usa debt is 100% of gdp.

  14. Mr. Buffett talks smack about S&P:

    http://www.cnbc.com/id/44056326/

    Then they downgrade Berkshire Hathaway.

    http://www.cnbc.com/id/44061491

    Coincidence?

    The heart of this BS crisis is that the people wanting the ratings should be paying for them, not the companies getting rated! That’s just common sense, man!

    Actually, I wonder what S&P’s angle is. How are they profiting from this? Not to sound like a tinfoil-hat weirdo, but are they driving down stock prices so their friends can buy it on the cheap or what?

  15. berkshire was not downgraded, the insurance companies were, some of which are owned by berkshire.

  16. StL Pastor says:

    Yang,
    As always, buy low, sell high. Panic selling after a drop like the last week is probably a bad plan. You should only invest for the long term, not the short term, getting in and out is the way to destroy your returns.

    Also, if you’re actually in a SP500 fund, you’ve lost at most 20%, not 50%, even after the bad day today, and probably more like 10%. Don’t overestimate your losses.

  17. Interesting post from Paul Krugman:

    http://krugman.blogs.nytimes.com/2011/08/07/sp-precedents/

    When assessing the downgrade, the question of track record comes up. As I understand it, countries that defaulted in the past were almost always downgraded well before the default happened; but in all such cases, the markets were already signalling big trouble before the rating agencies moved.

    The question should be, in cases when the markets aren’t signalling worry but the agencies downgrade anyway, how often are they right?

    The answer, I believe, is never

  18. Standard & Poor’s CEO Gives $$$ to Romney, Bush, GOP Party

    http://www.dailykos.com/story/2011/08/08/1004541/-Standard-s-CEO-Gives-$$$-to-Romney,-Bush,-GOP-Party?via=siderecent

    Might this also have something to do with the rating? Ya think?

  19. Keep in mind that the credit worthiness of the US (or any country) must factor in the value of the dollars that lenders are being repaid. So, while it seems unlikely in the near term that the US would ever default in the traditional way, we are, even now, defaulting in a different way. With QE, QE2, etc., we are simply watering down the value of the dollar further, paying our bills back in currency that is less valuable than when we borrowed it.

    The Paul Krugmans of the world think there is a permanent Keynesian free lunch. They advocate for even more deficit spending! It’s crazy.

    Yes, all the ratings agencies are a joke. But lets not miss the bigger story because of that. We are not going in the right direction fiscally. Cutting 2T over the next ten years so we can borrow that much in the next 18 months? We deserve AA+ and much worse, at least until Washington quits kicking the can down the road.

  20. Funny. Not many people said much about the &^%& situation that US is in now. And how this country can no longer pay its bills.

    I think S&P did a favor to this country, to wake up somebody to face the reality.

    Who doesn’t have a agenda? This country is in this shape right now because there are too many politician/people trying to think along his/her party line or ideology, not trying to think independently what is best for this country.

  21. Juggler314 says:

    Actually, if you follow your reasoning, it means that we are far past due for a ratings downgrade – every other big thing – they were extremely late in acting. So much like enron/worldcom/bear we are f*cked and just don’t know it yet;-)

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