So, yesterday people – particularly on the right – freaked out over this report that Standard & Poors (S&P) could lower its debt rating for the U.S. Except, like much of our financial overlords, S&P seems to barely know what the heck it’s talking about.
Two weeks ago, Standard & Poor’s put out a news release warning that it was poised to lower its ratings on almost 1,200 complex mortgage securities.
So what? Isn’t that dog-bites-man at this point?
Well, two-thirds of these mortgage bonds were rated only last year, long after the financial crisis. And S.&P. was supposed to have taken the distress of the housing crash and credit crisis into account when it assessed them. But in December, the ratings agency acknowledged that it had made methodological mistakes, including not understanding who would get interest payments when.
The last time S&P was in the headlines it was for giving investment grade ratings to hundreds of billions of dollars of securities that were backed by subprime and ALT-A mortgages. These mortgages were used to buy over-priced homes at the peak of the housing bubble. Many of these mortgages not only carried high risks, but were fraudulent, with lenders having filled in false information to allow homebuyers to qualify for loans that their assets and income would not justify.
Serious people should ask what S&P has done to improve its ratings systems. Have they changed their procedures? Did the S&P analysts who gave AAA or other investment grade ratings to toxic junk get fired or at least get demoted? If not, should we assume that S&P used the same care in assigning a negative outlook to U.S. government debt as it did in assigning investment grade ratings to toxic assets?
Of course it was not just bad mortgage debt that stumped the S&P gang. It gave top quality investment grade ratings to Lehman until just before it imploded in the largest bankruptcy in history. The same was true of AIG, which would have faced a similar fate without a government rescue. Bear Stearns also had a top rating until the very end, as did Enron. In short, S&P has a quite a track record in missing the boat when it comes to assessing creditworthiness.
They don’t know what they’re talking about with a lot of topics. Because of rampant deregulation passed under Democratic and Republican presidents, they were allowed to have a role in wrecking the economy.
So of course we should treat what they say as the word of God. Of course.
What the hell?