More S(illy) & P(reposterous)
August 10, 2011, 1:55 pm
Posted by Margaret O'Brien Steinfels
Maybe this is too much wonkidom, but following up on the previous post, especially Unagidon’s analysis, there is this op-ed in Tuesday’s Times: “The Revenge of the Rating Agencies”
“The credit rating agencies are taking advantage of the country’s financial problems to increase their own political power. They want to ensure that regulators do not reduce their autonomy and influence.”
Hmm. I didn’t realize that the ratings agencies were officially parts of the system.
In the last couple of days I read an article by Mohammed El-Irian (sp?) the head of PIMCO, a giant international investment company, in which he said that PIMCO does not rely on the ratings agencies when making its investment decisions — it does its own ratings! I’m sure it can afford to — it controls around 1 Trillion in investments. Wonder if other giant investment companies do the same. Maybe they could sell their information, yielding more competition.
If the gov’t started its own ratings agency it would inevitably be politicized unless it had the guaraneed independence such as the Fed’s. But I can’t see that happening..
Ann: I don’t think the rating agencies are part of government, or are even federal entities. Others may have more info (Elizabeth Brown?), but I think they were created by federal law to provide “accurate and objective” investment ratings for investors (consumers?) who did not have the wherewithal to do their own. I recently noted that Goldman-Sachs seems to do their own assessments, and probably their own research.
They are private entities. They are oligopolies (i.e. a handful of large entities dominate the market) because that is what happens in virtually all mature markets.
The op-ed smacks a bit too much of conspiracy theory to me.
Of course, I happen to think that all three ratings agencies are basically correct to call attention to the financial situation of the US government.
Let’s not forget that S&P was up to it’s eyeballs in the junk mortgage rating fraud scandal that lead to the stock market crash in 2008!
I am so furious that Obama didn’t take S&P by the throat and tell the that if S&P downgrades US credit worthiness, he was ordering the AG (Justice Dept.) to investigate S&P for their role in the housing mortgage collapse. And while they were at it, the IRS should investigate and audit each and every one of the principals at S&P just to make sure that everyone there is paying their taxes.
Just consider it as a friendly, preventative, rectal exam.
Obama should be treating S&P just like the government did Bernie Madoff – may he rot in jail!
This is essentially what JFK and RFK did to the steel industry in the early 60′s when it wanted to wreck the economy by raising the price of steel.
With a president who was ready and able to play political hardball, S&P would have meekly rescinded its actions lowering the US credit rating – before the stock markets had a chance to start acting like a roller-coaster and gobbling up the savings and investments of middle-class Americans…AGAIN!!!
Jim P: Calling attention to the financial situation of the US government: Actually if you read the S & P statement of Friday, it mostly calls attention to the political situation. Fair enough; it’s a mess. But I still like U’s hypothesis that S & P wants to come back strong and nothing like hitting the federal government. Also just fyi: the other two rating agencies have not downgraded the credit of the U.S.; only said they might!
The financial situation of the US government: better than most state government and at the moment (see stock market today) better than a lot of big banks. Yup, there are deficit problems in the future, but I don’t think what we’re seeing from S & P or the TParty has much to do with that deficit, and a lot to do with Republican Party politics.
Hey, Jim J – President Obama did play the kind of hardball you’re taking about with GM’s and Chrysler’s creditors when he engineered the automaker bailout while bypassing the normal bankruptcy process. And some of those entities were also major financial players. So he’s capable of intimidation tactics.
He seems to have had all the zip and verve sucked out of him by the deficit bill battle. Maybe the coming election will relight the fire in his belly.
Hi, Margaret, I also agree with U’s hypothesis. But I don’t believe S&P is a wholly owned, or even partially owned, subsidiary of the Republican Party. I think they’re looking to their own self-interest. Part of that is offensive – as U had described previously, to make a bold move in their marketplace – and part of it is defensive – ‘we don’t want to get caught asleep at the wheel again’.
If the government doesn’t want to get downgraded anymore, its best bet is to strengthen its finances. You don’t have to be a Republican to believe that. President Obama seems to feel the same way, judging from his negotiating stance in the recent deficit bill fracas.
“The op-ed smacks a bit too much of conspiracy theory to me.”
The ratings agencies are in the business of selling confidence. But how can one sell confidence if one cannot sell fear? Their word on credit worthiness took a beating in the recent market debacle (as Mr. Jenkins points out). But Wall Street is a herd of wildebeests that is still willing to trust the S&P when it makes a bearish judgment. I don’t see this as much of a GOP thing as it is a shrewd business move on S&P’s part. Sometimes the herd has to feel the bite of the lash to remember who is holding the whip.
I don’t know what to think about S&P.
Should it be Obama’s, “who cares, it doesn’t matter, we don’t need them to tell us the situation”? Or John Kerry’s, “this only makes the Tea Party look bad”? Or others on the left, “how dare S&P do this! we need to put our boot to their throat!”?
I don’t know Bender, I hear a lot of people on the Right complaining about the S&P’s move too, especially those who have a lot of money in equities. While it may or may not make the TP or the GOP look bad, I still tend to look at it as a shrewd business decision on S&P’s part.
S&P, Moody’s, and Fitch have oligopoly control over ratings because certain laws and regulations required ratings from a “Nationally Recognized Statistical Rating Organization” or NRSRO. To be an NRSRO, a credit rating agency must be recognized as such by the SEC. Originally more than a dozen credit rating agencies were recognized as NRSROs by the SEC but prior to the crisis only three remained – S&P, Moody’s, and Fitch. The laws and regulations require that banks, insurance companies, and pension funds must invest in securities rated as investment grade by a NRSRO. Investment grade means that the securities received one of the top 4 ratings by the NRSRO. Anything below investment grade is labelled as “junk”, i.e., junk bonds, and usually must pay a much higher interest rate in order to attract investors, which is why junk bonds got renamed “high yield debt” in the 1990s.
The Credit Rating Agencies Act of 2006 forced the SEC to revise some of the ways that it recognized and regulated NRSROs but it didn’t change things very much. There are now about 10 credit rating agencies that are classified as NRSROs. Nevertheless, S&P, Fitch and Moody’s still dominate the ratings market.
The Dodd-Frank Act attempted to encourage the SEC and other financial regulators to move away from reliance on ratings by the NRSROs and to make the NRSROs more accountable for their ratings. Dodd-Frank Act, however, delegated much of the details about changing the regulation of NRSROs to the SEC and the SEC has not done much on this front to date.
Elizabeth Brown: thanks for that info. Have all the rating agencies done badly on the sub-prime, etc., leading up the Great Recession?
And this on The SEC/Dodd-Frank, Etc. Arthur Levitt, former head of the SEC had a not very encouraging op-ed in yesterday’s Times about the state of the SEC and its regulatory travails. http://www.nytimes.com/2011/08/08/opinion/dont-gut-the-sec.html?scp=2&sq=arthur%20levitt%20jr.&st=cse
1)See the thread on Romney above and how to deal with credit agencies.
2)Don’t get too much hope up for less gridlock from the big 12.
I see Mitch nominated the”centrist” Kyl et al and Boehner’s guy are by the book no tax troops.
Baucus seemed like a great choice, Kerry?
Pelosi still to come.
IMO don’t get your hopes up.
30 So in the meantime, as a friend suggested to me by e-mail, get all the cash you canm and stuff it in your mattress, if you still have one.
Well, the market rejuvenated today. As I see it, the crazy scarries panickedon Monday, the crazy optimists returned on Tuesday, the cynics jumped in on Wednesday, and the ordinary, common sense folks looked around today, saw that the debt ceiling really isn’t all that important and profits are good, and the foreign folks realized that when push comes to shove the Americans won;t default after all.
Now the real fight begins. I’m not optimistic about the committee. Why should we be? I think the pols will all continue to talk big then let the next election settle whether or not there will be taxes added except for the most egregious loop-holes.
Tthere won’t be a real solution until Obama summons up enough courage to fight for stimulus-infrastructure money to increase jobs. The private sector has so far not invested the 2 trillion $ it’s keeping in the bank, and there is no reason to think that they are about to risk it until the government increases revenue somehow. So much for conservative economic theory about cash on hand and investing.