mykeystrokes.com

"Do or Do not. There is no try."

“First We’ll Undermine Wall Street”: Standard And Poor’s Had This Planned From The Start!

One of the funnier items in the news this past week was the assertion by lawyers for Standard & Poor’s that the Department of Justice, which is suing the agency for fraud, is just trying to punish it for its downgrade of U.S. credit in 2011.

S&P was one of the agencies that gave high ratings to complicated and very unsound investment instruments, especially collateralized debt obligations, in advance of the financial crisis. Since the agencies’ fees were paid by the same banks issuing the securities they were charged with evaluating, the agencies had no reason to be neutral in their assessments. They knew just how dangerous the securities were, but they were paid to look the other way.

Matt Taibbi looks over the evidence:

In incriminating e-mail after incriminating e-mail, executives and analysts from these companies are caught admitting their entire business model is crooked.

“Lord help our fucking scam…this has to be the stupidest place I have worked at,” writes one Standard & Poor’s executive. “As you know, I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it,” confesses a high-ranking S&P analyst. “If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value,” complains another senior S&P man. “Let’s hope we are all wealthy and retired by the time this house of card[s] falters,” ruminates one more.

Had the agencies been doing their job correctly, poor ratings would have forced bankers to stay away from the toxic assets. “The firm provided cover,” Michael Hiltzick writes. “No securities trader would be fired for taking the plunge on a mortgage-backed security, no matter how dubious, if it bore the seal of approval of S&P.” Senior bank executives would have had a better idea of how much risk these supposedly safe investments really entailed, and they would have been able to prepare for, or even avert, the collapse.

After the national embarrassment that was the negotiation over the federal debt ceiling in 2011, S&P revoked its perfect “AAA” credit rating for United States. Now, the agency claims that the government’s lawsuit is “retaliation for defendants’ exercise of their free speech rights with respect to the creditworthiness of the United States of America.”

A few points. First, this defense contradicts another argument S&P made earlier this year: that everyone should have ignored S&P’s ratings because (and I kid you not) no reasonable investor would ever rely on them, and therefore S&P should not be blamed for the catastrophe. If that is true, and the ratings are completely and utterly meaningless, then S&P’s decision to downgrade Treasuries simply cannot be interpreted as a statement about the creditworthiness of the United States.

S&P’s earlier position, absurd though it is, actually has a basis in reality. The agency studiously ignored the dangers accumulating in the financial system, and then, when it revoked the government’s AAA rating, the entire world studiously ignored S&P. Investors, having learned that whatever S&P says about your creditworthiness is basically horsesh, made their own decision about the likelihood of a U.S. default and continued buying Treasury bonds. Interest rates actually fell, as Hiltzik notes. “Maybe S&P is still trying to prove its point that no one ought to take it seriously,” Paul Barrett writes.

Finally, S&P’s sanctimonious posturing after the debate over debt ceiling and its measured statement of profound concern regarding the stability of the national economy in the long term appear particularly hypocritical given its share of the responsibility for the financial crisis. Indeed, had S&P done its part to maintain the stability of the global financial system, the federal government’s finances would be much stronger now.

Maybe someone at S&P had the entire charade planned from the very beginning. “First we’ll blow up Wall Street,” I can imagine him saying. “Then, to protect ourselves from fraud litigation, we’ll make sure we’re the first to question the federal government’s creditworthiness after Congress responds to the crisis with a massive fiscal stimulus. It will look like retaliation if they try to sue us then.” Fortunately for the rest of us, this strategy probably won’t quite work all the way.

 

By: Max Ehrenfreund, Washington Monthly Political Animal, September 8, 2013

September 9, 2013 Posted by | Big Banks, Financial Crisis | , , , , , , , | 1 Comment

An American Hijacking: Eric Cantor Acknowledges S&P’s Warnings But Urges Colleagues To Ignore Them

Standard & Poor’s decision to downgrade the United States’ credit rating Friday night came with clear shots at congressional Republicans who had refused to consider tax increases in the deal to raise the debt ceiling. S&P criticized Congress for allowing new revenues to drop from the “menu of policy options,” criticizing “the majority of Republicans in Congress [who] continue to resist any measure that would raise revenues.” The National Journal proclaimed it “hard to read the S&P analysis as anything other than a blast at Republicans.”

Unlike his party’s presidential candidates and several of his congressional colleagues, House Majority Leader Eric Cantor (R-VA) seems to have heard that blast, as he sent a memo to congressional Republicans today acknowledging S&P’s calls for tax increases. Despite hearing those calls, however, Cantor is urging his colleagues to ignore them:

Over the next several months, there will be tremendous pressure on Congress to prove that S&P’s analysis of the inability of the political parties to bridge our differences is wrong. In short, there will be pressure to compromise on tax increases. We will be told that there is no other way forward. I respectfully disagree.

As we have said from the beginning of the year, the new Republican Majority was elected to change the way Washington does business. We were not elected to raise taxes or take more money out of the pockets of hard working families and business people. People understand Washington can’t keep spending money that it doesn’t have. They want to see less government – not more taxes.

Not only has Cantor chosen to ignore S&P, he has his facts wrong about the American people. Polling conducted by the New York Times and CBS News found last week that half of Americans did, in fact, support the inclusion of new revenues in the debt deal, and numerous polls have shown wide support for ending the Bush tax cuts for the wealthy, a proposal that would reduce the federal deficit by $830 billion over the next decade. S&P today called the full expiration of the Bush tax cuts, which would save $4 trillion in the next decade, one of the major steps in restoring the nation’s AAA credit rating.

Given that S&P downgraded the U.S. in part because of political instability brought on by the GOP taking the economy hostage, Cantor urging his colleagues to ignore the agency’s warning likely won’t help the government’s attempts to avoid yet another downgrade in the future.

By: Travis Waldron, Think Progress, August 8, 2011

August 9, 2011 Posted by | Class Warfare, Congress, Conservatives, Consumer Credit, Debt Ceiling, Debt Crisis, Democracy, Economic Recovery, Economy, Elections, GOP, Government, Government Shut Down, Ideologues, Ideology, Lawmakers, Politics, Republicans, Right Wing, Standard and Poor's, Tax Increases, Tax Loopholes, Taxes, Teaparty, Terrorism, Voters | , , , , , , , | Leave a comment

Standard And Poor’s Goes Tea Party

Big headlines for a Friday night: “U.S. Loses Top Credit Rating!” Yes, as most now know, Standard & Poor’s went ahead with its warnings of the past weeks and downgraded the sovereign debt of the United States government from its pristine triple-A to a still stellar but one notch less so AA+. And after a miserable week in global equity markets that was almost as ugly as it gets, a week that began with the conclusion of a universally reviled debt-ceiling deal, the late-night downgrade was the fitting end.

The symbolism is undeniable. This is the first downgrade in history, as commentators rushed to remind us. But of course, that history goes back only to the late 1930s, when the ratings agencies began to hold sway. And S&P is the only one of the major three—Fitch, Moody’s, and S&P—to downgrade. So this was big bad news, a bad coda to a bad week, but only as news and not as a trenchant analysis of the creditworthiness of the United States or its ability to meet its debt obligations going forward.

Let’s be clear: Congress and the White House did not cover themselves with glory during the debt debate throughout July. The United States has a stalled economy and a large amount of debt. But on so many levels, this downgrade is absurd.

First there is the question of math. When S&P informed the White House of its intention to downgrade on Friday afternoon, the Treasury Department took issue with S&P’s math and claimed that their assessment of the trends of the U.S. debt burden and its ratio to GDP was off by trillions of dollars. No matter. After a brief review, the wizards at S&P went ahead and removed an A.

A news ticker reads “Standard & Poor’s downgrades US credit rating from AAA to AA+” in Times Square on August 5, 2011 in New York City., Andrew Burton / Getty Images

Second, what’s with the fetish for a so-called proper ratio of debt-to-GDP. Academic economists have done no favors here. Carmen Reinhart and Kenneth Rogoff have become the go-to economists for their work showing how countries that reach a 90% ratio slide into recession and see slowing growth well before. The U.S. current level according to S&P is 74% and will rise to 85% by 2021. The explanation of the downgrade closely tracks this academic logic.

I have no criticism of an academic theory about how nations function economically. But when debatable theories become the underpinnings of decisions by unelected individuals who run organizations with significant sway (sway ceded to them by governments throughout the 20th century), then we have a problem. We have a problem when that argument gives short shrift to the debt-servicing burden. The current interest rate that the U.S. government pays to service its massive debts is hovering around 2.5%, which makes interest payments as a percentage of GDP as low as they have been since the mid-1970s.

Servicing the debt does not enter into the analysis, yet that and current interest rates make all the difference. Dismissing that counterargument, warning that rates will of course rise (yet even if they double, that will still leave the U.S. more than able to meet its obligations), and drawing on theories about the “right” level of debt puts S&P in a strange bedfellow alliance with the Tea Party.

The people who run the ratings agencies are welcome to their analysis, as is the Tea Party. But if Rogoff and Reinhart or the Tea Party announced that they were downgrading U.S. sovereign debt, they would be laughed for their audacity. Yet when it is one of the anointed ratings agencies, there is this sudden need to genuflect.

This is largely because covenant after covenant in both SEC rulings and institutional money management (pensions especially) dictate that many types of capital can only be invested in credit-worthy instruments as determined by Moody’s, S&P and Fitch. The downgrade doesn’t remotely begin to threaten the “investment grade” status of U.S. debt, and there is little reason to suspect that borrowing costs will go up as a result. Still, the reason we are in this situation of having to genuflect to S&P is because an entire structure of credit and investments, and the issuance and purchase of bonds above all, has been built on the shaky and questionable foundation of the ratings agencies.

The worst part of the downgrade is this: S&P spent considerable time in the body of their explanation about debt and GDP and growth. But they didn’t lead with that. That wasn’t the kicker. No, this was: “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” The company assailed the Washington culture of “brinkmanship” so in display during the debt ceiling fiasco, and used that as the primary reason to take us down a notch.

Excuse me, but since when is a pristine political process a key ingredient to good credit? Are we supposed to have civil politics in order to maintain the rating? Are we supposed to have some mythic Scandinavian concord? Washington has usually been a mess, and arguably more now than ever. Nonetheless, the great distortion of the debt-ceiling imbroglio was that failure to do a deal would have led to a default. It would have led to a partial and then increasing complete shut down of the government, which would have soon enough forced a resolution. At no point would there have been insufficient tax revenue to meet the $20 billion of so in monthly interest payments on the debt, unless the crisis had gone on for months and months, which barring collective national psychosis simply could not have happened.

So S&P doesn’t feel comfortable that the American political process is conducive to dealing with long-term debt issues and so issued a downgrade. Yet S&P is a ratings agency, not a political arbiter. Olympic judges rule on athletic aptitude, not the politics of the athletes (usually). There is not a scintilla of evidence that the political process has yet impeded the ability of the United States to meet its debt obligations, even with the debt ceiling brinkmanship. The political process may indeed be contributing to the morass of the American economy, but the larger causes are the challenges of emerging economic centers and changing patterns of global commerce. Those are long-term issues that have little bearing on current ability to manage debts.

Finally, as a symbol that the United States is sliding off the rails, the downgrade is potent. It’s hard to argue with the reality that America is in a challenging moment that looks and feels a lot like decline. Whether that proves false and a new dawn awaits, we’ll find out soon enough. But the actions of S&P are part of problem and not just an independent verification that one exists.

These agencies have been elevated to heights that should not ascend; they have been chronically wrong and late in the past; and their rationale for a downgrade sounds more like a prim distaste for a dysfunctional political process that a reasoned assessment of the ability of the United States to discharge its obligations. No defense can be offered of our current political system or near-term economic prospects. But S&P—already on overreach as “neutral” judge of American creditworthiness—has no special standing to rule on the political system, and using that as a cudgel to prove their own power is a destructive act.

 

By: Zachary Karabell, The Daily Beast, August 6, 2011

August 7, 2011 Posted by | Congress, Conservatives, Consumers, Debt Ceiling, Debt Crisis, Deficits, Democracy, Economy, Federal Budget, GOP, Politics, Republicans, Right Wing, Teaparty | , , , , , , , , , , , , , , | Leave a comment

Speaker Boehner’s Folly Leads To Standard And Poor’s Downgrade Of US Debt

I’m no expert, but I don’t think S&P downgrading its rating of US debt will, as such, have any really big practical implications other than becoming the next political football. If you look at S&P’s definition of the AA rating, after all, it says:

“An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.”

Scared yet? Me neither.

The issue today continues to be what it was a week ago. For years now, if you look at a projection from CBO or OMB it shows a spending curve that steadily accelerates. It accelerates because the government currently pays for health care for old people and for poor people, and because the cost of health care services has been accelerating.

Consequently, for a long time now it’s been clear that in the future either the US has to stop paying for old people’s health care, or else raise more revenue in taxes, or else reduce the growth in the price of health care services. And for a long time now it’s been unclear what combination of those strategies will be adopted. But people have generally had confidence that some combination of them would be adopted.

Once upon a time earlier in the Obama administration, I asked a senior official how he thought this would ever get resolved. A deal, everyone agreed, had to be bipartisan. But to be bipartisan, it would have to include tax increases. But Republicans wouldn’t vote for tax increases. He told me that of course that made sense, but at some point pressure from bond markets would be unbearable and Republicans would come to the table.

Broadly speaking, that’s the thing that most people generally believed would happen. What we saw with the debt ceiling was a mini-test of that theory, and the theory failed. “No new revenues” wasn’t just a GOP bargaining position, it turned out to be something they were really committed to even in the face of an imminent financial crisis. You can see why that would dent confidence in the long-term fiscal trajectory of the country.

The person who looks bad here, in my view, is John Boehner. President Obama wanted to do a “grand bargain.” The Gang of Six Senators wanted to do a “grand bargain.” And it looked for a moment like Speaker Boehner was going to be part of a grand bargain. But ultimately he decided that he didn’t want to sign a deal that would fracture his caucus, so the grand bargain talks fell apart. And yet the little bargain that did eventually pass the House ultimately couldn’t pass with Republican votes alone. So what did Boehner really achieve? If he was ultimately destined to strike a deal with the White House that needed Democratic votes to pass the House, why not go for the grand bargain? According to Boehner “When you look at this final agreement that we came to with the white House, I got 98 percent of what I wanted. I’m pretty happy.”

How happy is he now?

 

By: Matthew Yglesias, Think Progress, August 5, 2011

August 6, 2011 Posted by | Congress, Conservatives, Consumer Credit, Consumers, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, GOP, Government, Health Care, Ideologues, Ideology, Lawmakers, Middle Class, Politics, President Obama, Republicans, Right Wing, Tax Loopholes, Taxes, Teaparty | , , , , , , , , , , | Leave a comment

Up Is Down: Michele Bachmann Distances Herself From Reality

Talk about cognitive dissonance. I went to a breakfast this morning with Alice Rivlin and lunch with Michele Bachmann. How to put this politely? If men are from Mars and women from Venus, Rivlin is from Earth, Bachmann is from Saturn. Someplace way out in the solar system and removed from reality.

Rivlin, a Democrat, is a former director of the Congressional Budget Office, former director of the Office of Management and Budget, and former vice chairman of the Federal Reserve. She is, in short, a Very Serious Person and, like every serious person around, finds herself somewhere between disbelieving and aghast at the current crisis over raising the debt ceiling.

“Putting a limit on the debt and saying, ‘Hey, we made these decisions but we didn’t really mean it, we’re not going to pay our bills,’ is just an unthinkable thing to do,” Rivlin said at an event sponsored by Atlantic Media.

“This is outrageous, folks,” she told interviewer Linda Douglass. “The greatest democracy, oldest democracy in the world should not be behaving this way.…It’s embarrassing for us to have a government that is so dysfunctional and that has created this artificial crisis.”

And the consequences could be catastrophic. “Suppose the world has decided that [debt ceiling crisis] might happen again and this democracy isn’t quite as solid or thoughtful as we thought it was, so we not going to stop lending to the United  States but we’re going to charge more interest. As the interest bill goes up, two things happen. One is it’s must more expensive for the government to carry this large debt….But more seriously it means that everybody’s interest payment goes up….So we would be paying more on our mortgage, more on our car loans, more on our credit cards, more for business loans and that’s not good for the economy.

It takes nothing away from Rivlin’s considerable intelligence and insight to say that she is expressing the conventional wisdom.

Fast forward a few hours to Bachmann, a congresswoman from Minnesota and Republican presidential candidate, addressing the National Press Club. Bachmann’s position is two-fold:

First, the debt ceiling should not be raised, under any circumstances. No deal could be good enough, Bachmann said, to induce her to do so. “I won’t raise taxes. I will reduce spending and I won’t vote to raise the debt ceiling,” she said. “And I have the titanium spine to see it through.”

Second, the United States will not default. “I want to state unequivocally I think for the world as well as the markets as well as for the American people, I have no doubt that we will not lose the full faith and credit of the United States,” Bachmann said.

Huh? Bachmann accused President Obama of employing “scare tactics” in warning of “catastrophic results for our economy.” But what do she and others in the titanium spine caucus think is going to happen when the United States can’t pay its bills?

Sure, Treasury Secretary Tim Geithner could manage to pay off bondholders. But as Rivlin and others explained, it won’t be too long before the checks due exceed the amount in the coffers.

An analysis by former George W. Bush administration Treasury official Jay Powell by the Bipartisan Policy Center shows that if the administration prioritizes payments to bondholders, Social Security recipients, Medicare and Medicaid providers, defense contractors and unemployment benefits (total $172.7 billion for the month) then it wouldn’t be able to pay another $134 billion worth of bills, including military active duty pay, veterans affairs programs, federal salaries and benefits, food stamps and Pell grants. You can shift around the numbers all you want but the bottom line is that refusing to increase the debt ceiling is not a sustainable option.

Bachman said that “saying no” to an increase in the debt ceiling would be “saying yes to job creation and to the next generation.” Up is down in Bachmann-world. The credit rating agencies are already threatening a downgrade. The grave implications of that are clear, for jobs now and stretching into the next generation with the hangover of higher interest rates.

Bachmann spent a lot of time invoking Ronald Reagan, so here’s one from the Gipper back at her. “The full consequences of a default—or even the serious prospect of default—by the Untied States are impossible to predict and awesome to contemplate,” he wrote to then-Senate Majority Leader Howard Baker in November 1983. “Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar in exchange markets. The nation can ill afford to allow such a result.”

By: Ruth Marcus, The Washington Post, July 28, 2011

//

July 29, 2011 Posted by | Budget, Conservatives, Consumer Credit, Consumers, Debt Ceiling, Debt Crisis, Deficits, Democracy, Economic Recovery, Economy, GOP, Government, Government Shut Down, Ideologues, Ideology, Jobs, Medicaid, Medicare, Politics, Public, Republicans, Right Wing, Social Security, Taxes, Teaparty | , , , , , , , , , , , , , | Leave a comment

%d bloggers like this: