Tuesday, April 19, 2011

Good One, S&P :)

Linkie from Bloomberg

As Standard and Poor's threatens the full faith and credit of the United States it's worth noting just who they are and have been. They are a very powerful arm of the investment banks that needed to borrow money from the United States government to stay alive (my opinion but the rest is fact). They are the people (along with Moody's) who rated the worst sub-prime mortgage trash derivatives composed entirely of triple-B mortgages as triple-A rated. Their logic was in asking what were the odds that real estate would go down in value? Aparently they thought the odds were zero. So, if an investment bank packed all these rotten mortgages together into derivatives, the derivatives were not rotten, they weren't even marked down, they were the highest rating of triple-A. Because of all the different rotten mortgages in the packaged derivatives it would be uncommon for a lot of them to go bust at the same time. Why? Certainly not logic based on any kind of education. Real estate can go up and down. It went down. It was a bubble.

One should not think too heavily about how such an esteemed group of financial wizards could make the mistake of thinking a market would always go up. No one with a grain of sense in investing would think that. People and institutions (many retirement institutions that could only buy triple-A rated investment vehicles) believed Standard and Poor's ratings without looking deeper into the derivatives they were buying. That was Standard and Poor's job. But heck, they were full of a bunch of people who believed that the real estate market would always go up, with a zero chance of it going the other way. Really?

No, not really. Ratings services like this get paid by investment banks for their ratings. Investment banks were selling the trash derivatives. In the aftermath of the inevitable, Standard and Poor's credibility has just been through the ringer. Any number of important people have realized they need to be investigated. I see two possible reasons for Standard and Poor's very fortuitously timed threat of downgrading the full faith and credit of the United States.

1) The investment banks want to bolster the idea of slashing the budget of the government (which would have to include entitlement programs like Medicare in the absence of new revenue from actions like tax increases) while keeping the taxes on the rich as low as possible, a strategy otherwise known as the Republican Budget, which was just trotted out (probably with the horrendous political fallout towards Republicans that we expected to come their way) uncoincidentally a few days ago. The timing makes this the obvious choice.

2) Innoculation against investigation. Imagine how it would look if we investigated them now? It would look as if we were unhappy not with their completely incompetant ratings of the past that directly led us into depression, but with their rating of us today. And that threat of decreasing our credit worthiness is an expensive item. The actual decrease that is surely to come will be incredibly expensive for the USA.

It's not like we don't deserve the bad ratings. It's just the timing that is not credible. We have been refusing to pay for our government for a while now. Tax cuts were the promises that got politicians elected. But wasn't there a little tipoff when the Bush administration started borrowing trillions for their wars and tax cuts? Wasn't there a tipoff when the country headed into the worst recession since the Great Depression? Nope. Investment banks were still considered the villians at this time. Now that time has passed and the blame is squarely on the backs of the Democrats (cough cough, choke choke) now is a good time.

Ok, there is a third possible reason for Standard and Poor's decision.

3) They have reformed.

Now that is a knee jerker.  Good one S& P.  :)

Linkie from Christian Science Monitor