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Let's compare these two news stories. The first is from early this year, and the second is from today.
Early this year:
<< Levin and Republican Senator Tom A. Coburn of Oklahoma held four public hearings in 2010. The Financial Crisis Inquiry Commission also looked into the role of ratings companies, calling them "key enablers of the financial meltdown" in its January report.
<< Relying on mathematical models, Moody's and S&P awarded AAA ratings to mortgage securities packaged during the five-year housing boom, deeming them as safe as government bonds. About 90 percent of AAA securities backed by subprime mortgages from 2006 and 2007 were later downgraded to junk status, Levin's committee said.
<< Such revisions forced banks, pension funds and insurance companies to sell holdings, contributing to $2 trillion in losses and asset-writedowns worldwide. >>
Source:
http://www.bloomberg.com/news/2011-04-13/moody-s-s-p-caved-to-mortgage-pressure-by-goldman-ubs-levin-report-says.html
Today:
<< Two government officials tell ABC News that the federal government is expecting and preparing for bond rating agency Standard & Poor's to downgrade the rating of US debt from its current AAA value.
<< Official reasons given, one official says, will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited. The official was unsure if the bond rating would be AA+ or AA.
<< A third official says that S&P made a "serious mistake" in its analysis, "based on flawed math and assumptions," so the Obama administration is pushing back. But even though "S&P has acknowledged its numbers are wrong, it's unclear what they're going to do.," the official said. >>
Source:
http://blogs.abcnews.com/politicalpunch/2011/08/govt-official-us-expecting-sp-downgrade.html
Chutzpah: Prior to 2008 S&P gave a high bond rating to mortgage backed securities. They even changed the way rated mortgaged backed securities to please the large banks that were their customers. At best it mas a terrible mistake. At worst, it was the largest fraud in world history. The consequences were the great recession, billions spent bailing out failing banks and a larger U.S. deficit. Now S&P says they want to downgrade the U.S. government's credit rating because we have a large deficit.
Why does anybody still listen to S&P?
S&P is right, though. We didn't do a single thing to actually reduce the deficit with the agreement made. All it did was slow down the increase in our debt by a little bit....and that's if it works at all. The deal includes questionable oversight that will likely not work and a provision for "emergencies" which we will see spring up quite a bit. The deal was laughable and the U.S. deserves to be downgraded for the shameful agreement Congress and the President passed.
Josh
Josh
For both economics and politics, Standard and Poor says.
In: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8
They don't like the way our political process seems to be working...
<The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
Without a revenue raise they think we won't cut entitlements enough...
<It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements,the containment of which we and most other independent observers regard as key to long-term fiscal sustainability...
And they think we won't raise revenues...
<...Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the (Budget Control) act.
It's chutzpah, for sure. I had no idea how outrageous until I read the Kardios post.
But the kid who murdered his mother and father IS an orphan!
Bairyn
In: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8
They don't like the way our political process seems to be working...
<The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
Without a revenue raise they think we won't cut entitlements enough...
<It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements,the containment of which we and most other independent observers regard as key to long-term fiscal sustainability...
And they think we won't raise revenues...
<...Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the (Budget Control) act.
It's chutzpah, for sure. I had no idea how outrageous until I read the Kardios post.
But the kid who murdered his mother and father IS an orphan!
Bairyn
No matter what they did in the past, they are correct now and should not be blasted for calling it like it is and downgrading us. We managed to not cut our deficit by a penny and still raised our borrowing cap. That's reckless and worthy of the downgrade. They should have dropped us further.
Josh
Josh
For a long time, Dennis Kucinich (D-OH) has been calling for a Justice Department prosecution of those at S&P who were responsible for the mortgage crisis. In recent appearances, he noted that S&P "was for sale to anyone who wanted a good rating"[1] and that "it's time to downgrade Standard and Poors to junk status."[2]
Also, I just read that S&P made a $2 trillion error in the calculations that they submitted explaining why they downgrading our bond status,[3] and they have admitted the error. It would be funny if it wasn't so important.
One analyst had this to say: "In my job as an analyst, if my forecast were off by 2 million, or 200 million let alone 2 trillion it would make it incredibly hard to say to my peers that my analysis was sound. I find it to be incredibly troubling from a ratings agency with a very terrible history in the last three years of its ability to quantify risk."[4]
- - - - -
[1] http://www.youtube.com/watch?v=0xvzv_pGYns
[2] http://www.youtube.com/watch?v=dRDEb4imEos
[3] http://tpmdc.talkingpointsmemo.com/2011/08/sp-downgrades-us-aaa-bond-rating-to-aa-outlook-negative.php
[4] http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-view-idUSTRE77504J20110806
Also, I just read that S&P made a $2 trillion error in the calculations that they submitted explaining why they downgrading our bond status,[3] and they have admitted the error. It would be funny if it wasn't so important.
One analyst had this to say: "In my job as an analyst, if my forecast were off by 2 million, or 200 million let alone 2 trillion it would make it incredibly hard to say to my peers that my analysis was sound. I find it to be incredibly troubling from a ratings agency with a very terrible history in the last three years of its ability to quantify risk."[4]
- - - - -
[1] http://www.youtube.com/watch?v=0xvzv_pGYns
[2] http://www.youtube.com/watch?v=dRDEb4imEos
[3] http://tpmdc.talkingpointsmemo.com/2011/08/sp-downgrades-us-aaa-bond-rating-to-aa-outlook-negative.php
[4] http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-view-idUSTRE77504J20110806
<< Also, I just read that S&P made a $2 trillion error in the calculations that they submitted explaining why they downgrading our bond status,[3] and they have admitted the error. It would be funny if it wasn't so important. >>
It isn't. A plan that doesn't DECREASE our debt is a bad plan. The current plan only SLIGHTLY decreases the amount of debt INCREASE over the next 10 years. It was a stupid plan that does nothing for our debt crisis. A two trillion error does nothing to change that.
Josh
It isn't. A plan that doesn't DECREASE our debt is a bad plan. The current plan only SLIGHTLY decreases the amount of debt INCREASE over the next 10 years. It was a stupid plan that does nothing for our debt crisis. A two trillion error does nothing to change that.
Josh
>A plan that doesn't DECREASE our debt is a bad plan.
No one has such a plan. Why? Because there's no need to reduce our debt in nominal terms. In fact, any such plan would almost certainly increase our debt in GDP-terms, due to the massive economic disaster it'd precipitate. On the other hand, to stop our debt growth relative to GDP, all we need to do is end a few wars and allow the Bush tax cuts to expire:
http://politicalcorrection.org/blog/201105240009
The US is not like a family. It doesn't need to pay off all its debt to be on sound footing; all it needs to do is get the deficit below GDP growth. But yeah, this particular plan is pretty useless even in that regard. (Gee, who could've called that when you put negotiations on an arbitrary deadline?)
- Greminty
No one has such a plan. Why? Because there's no need to reduce our debt in nominal terms. In fact, any such plan would almost certainly increase our debt in GDP-terms, due to the massive economic disaster it'd precipitate. On the other hand, to stop our debt growth relative to GDP, all we need to do is end a few wars and allow the Bush tax cuts to expire:
http://politicalcorrection.org/blog/201105240009
The US is not like a family. It doesn't need to pay off all its debt to be on sound footing; all it needs to do is get the deficit below GDP growth. But yeah, this particular plan is pretty useless even in that regard. (Gee, who could've called that when you put negotiations on an arbitrary deadline?)
- Greminty
<< Also, I just read that S&P made a $2 trillion error in the calculations that they submitted explaining why they downgrading our bond status,[3] and they have admitted the error. It would be funny if it wasn't so important. >>
When I read about the mistake my first thought was ... someone's going to go down big-time for manipulating the market. Money to be made in ... 'oh, sorry, my bad, we goofed' ... particularly if you know in advance it is going to happen.
Clunk
(Buy your swords at CBD weapons in Zul Logoth.)
Toadstool News and reminders at http://games.groups.yahoo.com/group/zullogoth/
When I read about the mistake my first thought was ... someone's going to go down big-time for manipulating the market. Money to be made in ... 'oh, sorry, my bad, we goofed' ... particularly if you know in advance it is going to happen.
Clunk
(Buy your swords at CBD weapons in Zul Logoth.)
Toadstool News and reminders at http://games.groups.yahoo.com/group/zullogoth/
When S&P was notified of the $2 trillion error, they didn't reconsider whether or not to downgrade. Instead, they just changed the rationale for why they were downgrading.
<< When the Treasury Department pointed out the overestimate to S&P on Friday before the rating agency went public with its announcement, instead of taking "another day to carefully re-evaluate their analysis" it shifted its rationale for the downgrade from an economic one to a political one, Bellows said.
<< The first draft of S&P's news release announcing the downgrade, a copy of which was sent to Treasury on Friday midday, focused on fiscal concerns, Bellows said. The final published version cites weakened "effectiveness... of American policymaking and political institutions" and "the difficulties in bridging the gulf between the political parties over fiscal policy."
<< "The haste with which S&P changed its principal rationale for action when presented with this error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action," Bellows writes.
<< White House chief economic adviser Gene Sperling added to the chorus of condemnation, saying S&P's behaviour "smacked of an institution starting with a conclusion and shaping any arguments to fit it."
<< "The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking," Sperling said.
<< The math error arose from S&P's mixing up two different scenarios calculated by the non-partisan Congressional Budget Office to figure out how much government spending will increase in the next decade. The company admitted the error in a news release on Saturday, saying its initial 10-year debt projection was indeed $2 trillion US too high. >>
Source:
http://www.cbc.ca/news/business/story/2011/08/07/world-us-credit-downgrade-fight.html
<< When the Treasury Department pointed out the overestimate to S&P on Friday before the rating agency went public with its announcement, instead of taking "another day to carefully re-evaluate their analysis" it shifted its rationale for the downgrade from an economic one to a political one, Bellows said.
<< The first draft of S&P's news release announcing the downgrade, a copy of which was sent to Treasury on Friday midday, focused on fiscal concerns, Bellows said. The final published version cites weakened "effectiveness... of American policymaking and political institutions" and "the difficulties in bridging the gulf between the political parties over fiscal policy."
<< "The haste with which S&P changed its principal rationale for action when presented with this error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action," Bellows writes.
<< White House chief economic adviser Gene Sperling added to the chorus of condemnation, saying S&P's behaviour "smacked of an institution starting with a conclusion and shaping any arguments to fit it."
<< "The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking," Sperling said.
<< The math error arose from S&P's mixing up two different scenarios calculated by the non-partisan Congressional Budget Office to figure out how much government spending will increase in the next decade. The company admitted the error in a news release on Saturday, saying its initial 10-year debt projection was indeed $2 trillion US too high. >>
Source:
http://www.cbc.ca/news/business/story/2011/08/07/world-us-credit-downgrade-fight.html
Nate Silver has a good article analyzing S&P's track record in rating sovereign debt. He concludes that S&P lags the market, makes ratings based on subjective analysis, and lacks predictive value.
http://fivethirtyeight.blogs.nytimes.com/2011/08/08/why-s-p-s-ratings-are-substandard-and-porous/
And in the context of private debt, S&P has a downright terrible record, which I do not have time to write about today, but you can find lots of articles on it by searching for S&P and mortgage-backed securities, Enron, Bear Stearns, etc.
http://fivethirtyeight.blogs.nytimes.com/2011/08/08/why-s-p-s-ratings-are-substandard-and-porous/
And in the context of private debt, S&P has a downright terrible record, which I do not have time to write about today, but you can find lots of articles on it by searching for S&P and mortgage-backed securities, Enron, Bear Stearns, etc.
Even Erick Erickson of Redstate.com is starting to acknowledge that S&P made a big mistake. Erickson offers more sinister reasons for S&P's actions than the White House has done publicly.
It's such a good post that I would love to copy the whole thing. But I'll settle for this extended excerpt. By all means click the link below and read the whole thing.
<< S&P, I'm told, began telling some of its clients about the downgrade on Friday morning. That's why the market was so screwed up on Friday.
<< By Friday afternoon, the Treasury Department told S&P it had made a $2 trillion math mistake.
<< But S&P had already told its clients about the downgrade. So it couldn't walk it back now without a major loss of confidence in its credibility. Could you imagine that conversation? "Hey . . . um . . . Joe. Yeah, Charlie here from S&P. So . . .um . . . we made a $2 trillion math mistake in our downgrade analysis. . . . What's that? You just lost $500 million in the market because of it? Oh . . . um . . . sorry Joe. Better luck next time."
<< So it had to come up with a different reason.
[snip]
<< By the way, to lend further credence to the idea that maybe the White House economic team is right and S&P screwed up, where did investor cash flee to during the market collapse of Friday and now, it seems, again today? Why U.S. Treasuries of course. >>
Source:
http://www.redstate.com/erick/2011/08/08/what-if-barack-obama-is-right/
I wonder if it was legal for S&P to leak this information in advance to its biggest customers so that they could sell stocks or take short positions?
It's such a good post that I would love to copy the whole thing. But I'll settle for this extended excerpt. By all means click the link below and read the whole thing.
<< S&P, I'm told, began telling some of its clients about the downgrade on Friday morning. That's why the market was so screwed up on Friday.
<< By Friday afternoon, the Treasury Department told S&P it had made a $2 trillion math mistake.
<< But S&P had already told its clients about the downgrade. So it couldn't walk it back now without a major loss of confidence in its credibility. Could you imagine that conversation? "Hey . . . um . . . Joe. Yeah, Charlie here from S&P. So . . .um . . . we made a $2 trillion math mistake in our downgrade analysis. . . . What's that? You just lost $500 million in the market because of it? Oh . . . um . . . sorry Joe. Better luck next time."
<< So it had to come up with a different reason.
[snip]
<< By the way, to lend further credence to the idea that maybe the White House economic team is right and S&P screwed up, where did investor cash flee to during the market collapse of Friday and now, it seems, again today? Why U.S. Treasuries of course. >>
Source:
http://www.redstate.com/erick/2011/08/08/what-if-barack-obama-is-right/
I wonder if it was legal for S&P to leak this information in advance to its biggest customers so that they could sell stocks or take short positions?
