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“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

“Uniquely American And Uniquely Stupid”: The Makings Of The Next Debt Ceiling Debacle

I hate to interrupt fulminations about President Obama’s three incredible shrinking scandals with something as prosaic as concern about the GOP’s threatening to sabotage the economy, but a couple of bits of real news emerged yesterday regarding the debt ceiling (yes that, again).

It’s actually a perfect juxtaposition: On the same day that an interview with Standard & Poor’s top U.S. credit rating analyst warned of tinkering with the debt ceiling, House Republicans huddled up to brainstorm about what their price should be for not deliberately tanking the economy.

On the one hand you’ve got an interview National Journal did with Nikola Swann, “Standard & Poor’s top analyst for the U.S. credit rating.” You will recall that Standard & Poor’s downgraded its rating of U.S. debt in 2011 after the last debt ceiling showdown. And you will recall that that showdown was engineered by the GOP as a political hostage-taking situation: Virtually everyone (or virtually everyone who is responsible) acknowledges that raising the debt ceiling is necessary to avoid the U.S. government defaulting on its obligations, which would be financially cataclysmic, but the Republicans threatened to force that exact scenario if they didn’t get spending cuts.

Now the debt-ceiling-fight countdown clock is ticking once again (the Treasury started its “extraordinary measures” to avoid default at noon today), with the moment of crisis expected to hit some time between August and year’s end. Does the prognosis look any better? “We have not seen any strong evidence that the political system as a whole is more effective, more stable, or more predictable than we thought it was in 2011,” Swann told National Journal’s Stacy Kaper. “There does seem to be, especially in recent years, an overall trend in the U.S. to effectively make major policy decisions at the last moment in a crisis setting. We don’t see that as credit-positive.”

That’s delightful understatement. He goes on to say that in order to avoid another credit downgrade, the U.S. should extend the debt ceiling for five years and bring the debt-to-GDP ratio under control with a plan that is actually credible. House Republicans passed a bill (which stands zero chance of becoming law) which would allow the Treasury to prioritize government payments (which would still leave the government in a position of not paying its bills … it would just be not paying for goods and services while making sure that its debt holders are taken care of). “This does not sound like a very comfortable scenario,” he says in another bit of understatement.

The final point in the interview is the most instructive:

S&P rates over 120 sovereign governments, including all of the wealthy developed ones. Of those, there are very few that have anything similar to the U.S. debt ceiling. Of those countries that do have some kind of legislated limit on the amount of debt, that limit is set as part of the budget-setting process. It almost never is divided the way it is in the U.S. We don’t think it is helpful to credit quality.

The very idea of a debt ceiling that doesn’t rise with authorized spending is, in other words, both uniquely American and uniquely stupid. Why? Because it lends itself to the kind of irresponsible hostage taking the Republicans are gearing up to engage in yet again.

And it’s a political terrorism scheme that is increasingly disengaged from reality (to which its connection was tenuous at best anyway). To wit: The last time around the GOP objection to the debt ceiling was grounded in rising deficits; this didn’t make their threats less irresponsible but at least established a plausible-sounding connection between their threat and their demand. But the budget deficit is, as my bloleague Pat Garofalo wrote earlier this week, the incredible shrinking issue. As a percentage of the economy, it is now roughly half of what it was when President Obama took office.

But Republicans know they’ve got a hostage so they’re bound and determined to extract a ransom. Hence the brainstorming session they held yesterday where 39 different members of the House GOP conference arose to offer their idea of what policy they should demand in return for not intentionally tanking the global economy. The ideas, according to various reports, ranged from approval of the Keystone XL pipeline to doing something about partial-birth abortion.

My personal favorite item comes from Jonathan Strong’s account at National Review Online:

The Ryan budget passed by the House assumes repeal of Obamacare. So if House Republicans were to press for enactment of the Ryan budget in exchange for raising the debt ceiling, that would entail repealing Obamacare – which is why there are pangs of doubt within the GOP leadership about whether that strategy is realistic.

So GOP leadership thinks demanding that the president sign onto the radical Ryan budget is unrealistic because it would necessarily involve repealing Obamacare? As if the Ryan budget’s dramatic cuts to discretionary spending and gutting of Medicare and Medicaid would be evenly remotely acceptable were Obamacare not involved? The whole scenario yesterday has the air of fantasy – like my wife and I arguing over what we’ll do when we win the Powerball tomorrow night (she looks oddly askance at my plan to commute via jet pack).

 

By: Robert Schlesinger, U. S. News and World Report, May 17, 2013

May 18, 2013 Posted by | Debt Ceiling | , , , , , , , , | Leave a comment

   

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