Last week, Moody's -- the ratings service that played a central role in the financial crisis, the results of which remain painfully alive -- threatened to downgrade America's credit rating.
Here's what they said in their press release:
... if there is no progress on increasing the statutory debt limit in coming weeks, {they} expect to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default.If the debt limit is raised and default avoided, the Aaa rating will be maintained.
However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.
So here's the thing. (One of President Obama's favorite locutionary preambles.) Should Moody's be in the business of prospectively rating sovereign debt based on whether or not a government takes certain steps? Do they have the financial credibility and morality authority to do that? Should they be reacting to the current situation or should they be theorizing about a complex and variable collection of uncertainties in the future?
This is not an insignificant distinction. Moody's exists for a very simple reason: to provide dispassionate analysis -- resulting in a grade -- that allows potential investors to determine whether or not a particular debt instrument can be trusted, and through that, how it should be priced.
But by wading into the debt reduction battle, Moody's is no longer an entity that analyzes credit risk in the present tense. It becomes an entity that attempts to influence and shape policy. Should a for-profit, public company be threatening the government by saying do this or else? Highly doubtful.
Further, why would anyone trust Moody's about delayed risk when they were so brain-dead when it came to assessing immediate risk? Let's not forget the billions of blithely over-rated CDOs and other instruments in the long and frothy run-up to the sub-prime crisis. As Phil Angelides, who ran the Financial Crisis Inquiry Commission bluntly put it:
They {Moody's}were huge enablers of these toxic mortgage securities... they failed miserably. They approved fraudulent products. This is as if UL (electronics testing firm) was testing toasters, and 90% of them blew up in your kitchen.
The profound structural flaw in Moody's business -- and this is no secret -- is that they are paid by the very issuers they are supposed to weigh in on, objectively. ProPublica neatly summarizes the stunning problem:
The ability for bankers to run the show has long been an obvious flaw in the ratings system for structured products. Investment banks create the securities and benefit when they receive generous ratings. Banks pay the agencies that supply the ratings. Yet the agencies are somehow supposed to hold the line with the people who are responsible for their paychecks.
This was supposed to be fixed by Dodd-Frank. But it hasn't. ProPublica goes on to point out that:
Since {the melt-down} the government has tried to change the ratings agencies. The Dodd-Frank financial reform law has some bold measures, like making the ratings firms liable for their judgments. Unfortunately, the rules are in danger of not being enforced because of budget constraints and resistance from the agencies.
So here we have Moody's continuing to be the same wealthy fox guarding the same complicit hen house. But that doesn't stop it from lecturing the Fed about its own borrowing habits.
I think are two very strategic reasons behind Moody's well-publicized warning last week. The first is PR spin. They want to be seen not just as thought-leaders, but as advocates of fiscal prudence. Leave the past behind by identifying yourself with a conservative view of debt, even though you made millions for yourselves and the banks by expunging "default" from your spell check, and tossing caution to the winds.
Moody's should not be attempting to influence fiscal policy here -- or anywhere else (including Japan, while they are similarly trying to browbeat the government) -- with the specter of ratings punishment.
The second reason that Moody's inserted itself in the debt ceiling debate is that they sell research on sovereign debt, so the fact that they were able to send the markets into a tailspin with their comments about U.S. debt becomes a branding statement about their global power.
Here's how their marketing materials pitch their expertise:
Moody's rates over 450 sovereigns and sub-sovereigns around the world... Our Sovereign specialists work closely with economists, bank analysts, legal, accounting, and regulatory specialists to clarify the real risks of sovereign securities and to equip you with the information to identify value.
What a lovely ecosystem for them. Moody's issues a press release that warns the U.S. is potentially headed for a downgrade. The media jump all over it, and their name gets associated with fiscal prudence. (Meanwhile, they are still being compensated by banks in the old exploding toaster model.) At the same time, their salespeople fan out all over the world and sell their sovereign debt research, using their PR release on U.S. fiscal policy as exemplary of their expertise and influence. And "objectivity."
This week, a report found that around 40% of all those who took out second mortgages are now underwater with their houses. Of course, Moody's rated millions of those bundled mortgage instruments as investment grade.
Now, the same people who paid no attention to the quality of the underlying mortgages are attempting to re-brand themselves as fiscal Puritans by threatening to downgrade U.S. debt. And they'll make money from that in the process. Is there any wonder that our trust is under water?
Cross-Posted from BusinessInsider.com
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Hmm, I would say you reveal which it is by their involvement prior to any ceiling decision being made.
Shouldn't their be a movement to de-list them and remove executive directors?
And they are probably wrong most of the time on purpose.
How about all that AAA (best) ratings for all that Wall Street junk?
That says it all.
However, if we let them rate foreign countries and all companies, it would look ridiculous to try and stop them from rating America.
Credit rating agencies are BUSINESSES....and we should take them as such.
"Levying war" does not have to include bombs and invasions. It includes electronic threats to our infrastructure. It could reasonably include attempts to disrupt the economy.
If Moody's decides to downgrade the debt of the United States, it would have a catastrophic effect on the economy -- and it knows it. Moody's engages in insider trading. Coordinate with big banks raise and investors to raise interest rates through the roof, skyrocket unemployment and jump inflation jumps into double digits, forcing the US to print money to cover expenditures. Then demand government cede economic policy to the big banks and ...
The effect would be much worse than 9-11. It would be more economically catastrophic than the wars in Afghanistan and Iraq.
Should Moody's do this, we ought to respond with appropriate force. Surround their offices with SWAT teams. Seize and jail their officers, nationalize the banks, fire CEOs and upper management teams and freeze their assets for examination. Tell the oil companies they'd better behave unless they wish to be nationalized as well. Look for other players in the game and hit them hard.
The attacks on the economy and people of the US seem well-coordinated. It is time to wake up to the fact that corporatists are making war on the US economically.
You ask three questions of Moody’s:
1) *Moody's be in the business of prospectively rating sovereign debt based on whether or not a government takes certain steps?*
Sure! It is what they should be doing. As with other countries (and companies) they analyze those material issues that might have a future material impact on the quality of the subject’s debt. I know you like to spin it like they are unduly ‘influencing’ government policy but I see it as they are simply stating impact of those polices on the quality of US debt.
2) *Do they have the financial credibility and morality authority to do that?*
I believe they do, at least better than other entities tracking the same data. If you do not, then do not adhere to their advice and buy the debt at your own peril. Many an investor has made good profit by contrarian investing and I implore you to do the same. Regardless, as a messenger stating the obvious, which is that if the US does not raise its debt ceiling and/or get its debt under control the chance of default increases, their opinion is not unwarranted.
3) * Should they be reacting to the current situation or should they be theorizing about a complex and variable collection of uncertainties in the future?*
They should be analyzing both: short-term material events that can cause default, e.g. not increasing the debt limit, and long-term sustainability of current borrowing.
Kai
IMHO, I believe them more valid than most to make a call on the problems of our debt. If you disagree, vote with your money, buy American debt.
Kai
IMHO, thsi is one of those articles where the author is attempting to discredit the messenger (easily done I would agree) becuase he does not like the message, though the message is valid.
Kai
And we could go back to the tax rates before Bush got his hands on them.
And we can pay politicians (both parties) by how well they perform and never more than they are getting now. It should be PUBLIC service and not private enrichment.
Of course we can go after the Wall Street and Bank crooks so others might think twice before taking huge, crazy risks with the money of others.
We could re-regulate our banks and Wall Street and cut out all their crazy actions that threaten the very economic health of America.
And we could cut out corporate loopholes and subsidies.
Companies that outsource should have higher taxes and only consider tax breaks for those that increase American jobs.
We could get rid of the free trade agreements.
Maybe, if we put America AND Americans first....AND stop printing money and borrowing, maybe we can put our country back on the right track!
Jail's too good for them- they deserve to be sentenced to live on the Social Security/Medicare of someone who only earned Federal minimum wage for their entire career!
That's an alternative criminal sentence I can approve!
Just ignore the debt. Maybe it will go away.
Ostrich economics.
This US government attitude is very disturbing to those very same foreigners in industrialized nations that the US government hopes will buy more and more of our freshly printed US Treasury Bonds and securities (hopefully at not too much of a discount and/or not very high interest rates) to pay for our federal US government deficit spending, economic stimulations, our trade deficits, our wars, our social programs, our environmental activities, our free medical care, our bureaucratic employee payrolls, and other various necessary and unnecessary government expenses with the US dollars that the foreigners earned by making things for US consumers and then "loaned" these US dollars back to the US government when the foreigners buy freshly printed US Treasury Bonds.
The USA must re-industrialize and again start to generate national wealth before the USA no longer has any assets that foreigners will trade for our freshly printed paper US Treasury bonds.
When the USA has no more privately owned wealth and assets (real estate and businesses) for foreigners in industrial countries to exchange for freshly printed paper US Treasury Bonds and freshly printed paper US Dollars that we gave the foreigners to make consumer products for US citizens, those foreigners will not accept any more of our freshly printed US dollars to pay for the consumer products that we continue to import and consume.
At this time the purchasing power of the US dollar will approach zero.