There's been a lot of talk recently about the enormous power that's been given to the Deficit Commission, which is co-chaired by Alan "Social Security recipients are milking it" Simpson and dominated by people who have advocated cuts to Social Security and Medicare. But here's an aspect of the story that's gone unremarked: Standard & Poor's, the credit rating agency whose reputation should rightfully have been shattered by the economic crisis, is now dictating policy to the United States government. S&P just put our elected officials on notice: Submit to the proclamations of the Deficit Commission or we'll downgrade our rating of government debt.
That's blackmail, plain and simple. This threat comes from a privately-owned company whose rating process is riddled with conflicts, and which has gotten virtually every critical assessment of recent years spectacularly wrong. Enron? Lehman? Subprime mortgages? They were zero for three. Yet rather than reining back their penchant for reckless proclamations, the chairman of S&P's "sovereign rating committee" said that our elected officials' response to the Deficit Commission would be crucial to its analysis of US debt. John Chambers said last week: "It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes." Just in case his intent wasn't clear enough, he added: "It is very important for Congress to take the required steps."
"Sovereign" is right. That's a kingly proclamation.
Bear in mind, we supposedly don't know yet what the Deficit Commission will propose. (We have a good idea, of course, since both the Democratic and Republican co-chairs are long-time advocates for cutting Social Security.) The total extent of the Commission's recommendations, and the extent to which they'll actually provide financial stability, are supposed to be completely unknown at this point. S&P's statement isn't an analysis, since there's nothing to analyze. It's a threat: Turn your authority as elected representatives over to this unelected body or we'll cause financial damage to the United States Government.
It's not a hollow threat, either. This statement was made one day after S&P downgraded Ireland's debt. A downgrade could cause massive harm to the United States government at a time of extreme difficulty. Debt could be harder to obtain, and it would become more expensive. That, in turn, would plunge the US deeper into debt. So who, exactly, is issuing this warning? What kind of credibility do they have?
Standard & Poor's is a division of McGraw-Hill, a publicly traded publishing company. They are a for-profit company, as is their fellow rating agency Moody's (which issued a similar threat last March). Both of these for-profit companies have eagerly pursued the very institutions they were rating, to disastrous effect. Internal documents obtained by the Levin Subcommittee showed that both Moody's and S&P let the profit motive compromise their judgments in the run-up to the economic meltdown. As we noted in a previous analysis, one internal S&P email said this about a rating they did for a customer: ""I don't think this is enough to satisfy them. What's the next step?"
Here's another example of S&P's integrity. When an analyst asked to review loan files for a security he was asked to rate, his supervisor told him the request was "TOTALLY UNREASONABLE!"
And consider this reported comment, which occurred during exploratory acquisition talks with investment research company Morningstar: "The S&P people insisted to Joe Mansueto (Founder/Chairman) that he was leaving big mounds of money on the table by not charging mutual funds for their 'star' ratings. Joe replied to the S&P bidders that it was an obvious conflict of interest to charge the funds for their own ratings -- how would Morningstar maintain its independence? They called him naive -- and stopped the merger talks."
The comments, though unconfirmed, have not been denied. Expert money manager Barry Ritholtz, who reported the story, indicated his confidence in his source and added, "This anecdote rings rather true to me."
Moody's fared even worse in our review of Levin Subcommittee documents. Of four key objectives for its Structured Finance Group, responsible for ratings, "high quality ratings and research came in dead last - behind "generating increased revenue," "increasing market share ...," and "fostering good relationships with issuers and investors."
Get the picture?
Why would companies like Standard & Poor's and Moody's issue threats of this kind? There could be many reasons. One might be to please its corporate clients, who would like to see government spending cut for both ideological and business reasons. Another might be to encourage cuts in Social Security because, under current proposals from both parties, that would place more retirement savings in funds and accounts managed by S&P's key clients. Moody's may also legitimately believe that the deficit needs to be reduced immediately, which is debatable on economic grounds. But if the Moody's action was arguable, S&P's statement is indefensible.
The ratings agency system is broken. These private companies have accrued enormous power without earning it. A lot of that power has been handed to them by government actions that rely on their ratings. That's why the Senate voted for the Franken Amendment, which -- while leaving these companies private -- would have removed the inevitable conflict of interest that's created when they compete for business. (The House/Senate Conference eliminated the Franken Amendment, calling instead for a two-year study. While the final bill is weighted toward an action of the kind called for by Franken's amendment, two years gives lobbyists a long time to influence the outcome.)
Standard & Poor's are called "agencies," but they should be called by their proper name: For-profit companies. These "ratings companies" have undermined the free market by allowing powerful issuers and investors to influence their own ratings. Markets with bad information - information that's bought and paid for - aren't really "free."
Now the "rating companies" are targeting the democratic process, too. We need a national discussion about the proper role of these companies, before they cause even more damage. Standard & Poor's should be reprimanded for its inappropriate and unprofessional intrusion into the working of government. And everyone needs to be reminded: Neither Congress nor the Executive Branch can 'outsource' the democratic process. They are our elected representatives. They must not be forced to submit to conflict-ridden private companies with a track record of failure.
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street and Strengthen Social Security projects. Richard also blogs at A Night Light.
He can be reached at "rjeskow@ourfuture.org."
Website: Eskow and Associates
Follow Richard (RJ) Eskow on Twitter: www.twitter.com/rjeskow
But more importantly: it's just more bad publicity for them, bringing it out into the forefront once again that they don't care about their research and methodology, but only about revenue.
I wonder which client would like to see the US downgraded. Sounds like one should check whether some prop desks are being influential here.
No nation is truly sovereign so long as private banks create its currency and credit.
I say, let Wall Street collapse.
Is our gov going to listen to them too? Probably. that's where Obama gets his "market credibility". Now I understand what he's saying.
we're toast
In all of the financial oversight legislation enacted recently, what, if any, of it affects credit rating agencies.
But no...rather have gins than butter.
Fox Arabia noise drivel.
"Dear America. I am your trading partner. From this day forward, you must pay me in Euros. You must exchange your Dollars for Euros on the open market, as the Euro is not and will not be pegged to the Dollar."
And, likewise:
"We will henceforth not consider the credit ratings of S&P, Moody's, etc., but only our own agencies. It has clearly been demonstrated that your companies are maliciously harmful to our interests."
Boom.
I believe that it is self-evident that both of these moves are imminently sensible, even necessary, in the point-of-view of any reasonable businessman. The USA is being brazenly dishonest in its dealings and manipulative of others, and the jewel in its magic wand is the status of its currency ... a status which said currency does not deserve.
Likewise, American financial companies are being dishonest, not only with the governments and businesses of other nations, but with its own!
And, "gosh, that's why we have National Borders."
However, we need to all come to our collective senses and recognize that the current and anticipated levels of debt the nation is acquiring is not sustainable. Our governent's debt for next year is expected to be over 14 trillion dollars. In numbers it looks like this: $14,000,000,000,000. Republicans have got the get their heads out of the ideological sand and accept that some tax increases are necessary. Democrats have got to get their collective heads out of the ideological sand and accept that spending cuts are necessaary. The fantasy that we can "grow" out of this debt is a false hope.
Other than spending cuts and tax increases the only other options are default and hyperinflation. If we default, no one will loan us money and the federal government currently has to borrow almost half of what it spends. If we just print dollars to repay these debts it will resut in hyperinflation (which will make everyone mirsrable) and the bonds will become virtually worthless (which will make borrowing almost as difficult as default would). Both parties have acted grossly irresponsible with our nations resources. Petty partisanship is useless and destructive, we've got to all demand that politicians address these issues now before we really have a financial colaspe and plunge into thirld world conditions. Down with partisanship, Up with citizenship!
The US treasury reports a surge in demand for Treasury bonds this week, the market isn't peeing in its pants, why are you?
There is no measure of our debt that indicates that this is healthy or sustainable for our economic future. Here on this very web site there have been articles about the dangerous condition of our debt levels. Since your writing suggests you have some knowledge of finance and econ, you must know that the demand for treasuries was for short term paper. Few are willing to take the risk of long term or even medium term paper becasue the risk of default or inflation is too great.
Instead of Dems that are commited to not cutting programs, or Repubs who are commited to not raising taxes; we need leaders who are commited to this nation's long term survival and prosperity. Leaders who can build concensus and give people the vision and courage to make sacrifices to achieve long term stability and reopen the arteries of growth that this debt is clogging up.