Today I am going to do something different, openly praise blatant incompetence. I will list my reasons later but first let me sing the praises of sheer incompetence at Moody's, Fitch, and the S&P (the big 3 rating agencies).
Downgrade of U.S. Debt Long Overdue
Many are in shock that the S&P downgraded debt of the US from AAA. Not me. It was long overdue.
However, the S&P proved it was incompetent in the way it made the downgrade. Pray tell how can a rating agency make a $2 trillion error? The answer is obvious: sheer incompetence.
The irony is Moody's and Fitch proved they are incompetent by not downgrading U.S. debt.
If you need a myriad of reasons, I highly recommend Issues and Solutions for Restoring Credibility to the Credit Rating Agencies and Rehabilitating the Alternative Banking System by Janet M. Tavakoli, President, Tavakoli Structured Finance, Inc.
Also note that Egan-Jones downgraded US debt on July 18 from AAA to AA+ and nobody batted an eye.
"We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada's 35%."
The SEC certifies Egan-Jones as one of 10 NRSROs "Nationally Recognized Statistical Rating Organizations".
The "Big 3" NRSROs are Moody's, Fitch, and the S&P.
Most have never heard of Egan-Jones or any rating agencies but the big 3, and that explains why nobody howled when Egan-Jones did its downgrade, yet everyone howled like rabid wolves over the S&P's action.
The wolves demanded action and action they got.
S&P Under Justice Department Investigation
The Associated Press reports Justice Department investigating Standard and Poor's mortgage securities ratings .
The Justice Department is investigating whether the Standard & Poor's credit ratings agency improperly rated dozens of mortgage securities in the years leading up to the financial crisis, The New York Times reported Wednesday.S&P Investigated for Insider Trading
The post-downgrade backlash against S&P seems to be gathering strength.Nearly universal sentiment was that treasury yields would rise on a downgrade. I said "no effect". Yields plunged in spite of the downgrade, so clearly the decision had no effect.
The FT is reporting, citing anonymous sources, that the SEC is investigating whether there was any insider trading done by employees of Standard & Poor’s ahead of their downgrade of the US a week ago.
Dow Jones Newswires writes:
"The U.S. Securities and Exchange Commission has asked Standard & Poor’s to disclose who within its ranks knew of the recent decision to downgrade U.S. debt before it was announced, the Financial Times newspaper reported Thursday on its website, citing unnamed people familiar with the matter."
Remember, rumors of a post-bell downgrade were rampant on Wall Street very early on Friday, rumors that turned out to be true. It sure sounded like a leak, though the leak could have come from either S&P or Treasury. It seemed inevitable there would be an investigation, though it could be hard to find anything.
MarketWatch points out that, according to the 2006 Credit Rating Agency Reform Act, S&P could have its license revoked if it leaked word of the downgrade.
The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.
Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO).
Establishment of the NRSRO did three things (all bad):
- It made it extremely difficult to become "nationally recognized" as a rating agency when all debt had to be rated by someone who was already nationally recognized.
- In effect it created a nice monopoly for those in the designated group.
- It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn't sell it. Of course this led to shopping around to see who would give the debt the highest rating.
The solution is to raise one or more rating agencies up to standard to merit the NRSRO label. Meanwhile, rating agencies can continue to issue ratings but must commit to coming up to standard. Those that cannot should have the privilege of issuing ratings completely revoked. The second part of the solution is to develop global third party benchmarks and global third party rating scales and make accurate ratings the only measurement of success.No, that is NOT the Solution
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