Hello kettle, pot on line one

Credit ratings agency Standard & Poor’s roiled the markets yesterday with a pronouncement that it has placed the United States of America’s “'AAA' long-term and 'A-1+' short-term sovereign credit ratings on CreditWatch with negative implications.”

This comes on the heels of a possible Moody’s downgrade announcement a day prior. “Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.”

S&Ps CreditWatch indicates a substantial likelihood of taking rating action in the next 90 days.

It is ironic because what brought this to a head is the credit crisis and resulting great recession, which is ongoing despite technically being out of it for more than a year. And while there were many culprits, right at the top of the list has to be the aforementioned credit ratings agencies. It was them who chose to slap AAA ratings on massive amount of collateralized debt obligations (CDOs) and other mortgage backed securities. It is them who were compensated by the very investment banks that were creating these products as quickly as mortgage lenders could write bad loans and sell them off to be bundled in various mortgage backed securities. The shocking conflicts of interest of how these ratings agencies operate is arguably public enemy #1 in the crisis.

The very nature of most of these products—subprime mortgages—meant they were higher risk products. Nothing wrong with that if they were labeled as such but they were not, and they were not because the banks who created the products needed the AAA ratings to sell their CDOs to the widest group of investors, many of whom are restricted from investing in things not rated as investment grade.

Bottom line is the banks paid for the ratings.

As noted here at the onset of the crisis all the way back in August 2007, the fact that high risk investments were rated as low risk investments is extremely dangerous because entities used these products as collateral and leveraged off of them as if they were AAA government debt.  

In an upcoming Futures interview with Securities and Exchange Commission (SEC) Chairman Mary Schapiro, the SEC chief talks about the conflicts of interests with ratings agencies and steps she is taking to address it.

Frankly, given there complicity in the crisis, I am surprised the ratings agencies are still around.

This is not to say the Federal government should not get debt under control. The growth path of entitlement programs made the conversation we are having today  on debt inevitable, the financial crisis just moved things forward a bit. However, in the last week I have seen stories from ratings agencies and the heads of several investment banks talking about what the government needs to do. These are the folks that got us into this mess and seemingly got off scot-free.

Don’t know why the government doesn't just  do what the banks did and pay for their ratings.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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