Gross says investors shouldn’t trust Moody’s on U.S. AAA rating

September 25, 2013 11:28 AM

Investors shouldn’t trust the opinion of Moody’s Investors Service on the U.S.’s Aaa rating and should rely instead on the company’s competitors, according to Pacific Investment Management Co. founder Bill Gross.

Moody’s and the U.S. Treasury are one “happy family,” Gross, manager of the world’s biggest bond fund, said today in a post on Twitter. “Trust S&P, Fitch & Egan Jones” for credit ratings, he wrote. Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, said Gross was referring to Moody’s stance on the U.S. debt limit and potential for a government shutdown.

Moody’s assigns the U.S. a stable Aaa ranking and said yesterday it expects the debt ceiling to be raised, averting a default, and for the government to avoid a shutdown. Fitch Ratings, which has a negative outlook on its AAA grade, has said its assessment of the country’s credit is taking into account the political debate over raising the debt ceiling.

Michael Adler, a spokesman for Moody’s, declined to comment.

Standard & Poor’s cut the U.S. rating to AA+ from AAA in August 2011, a move that reflected the impasse over raising the debt limit as well as the government’s lack of a plan to rein in its debt load.

Record Low

While the S&P downgrade didn’t result in investors charging the U.S. more to borrow, as 10-year yields slipped to a record 1.38% in July 2012, the move contributed to a global stock-market rout that erased about $6 trillion in value from July 26 to Aug. 12, 2011. Yields on Treasuries due in 10 years have risen to 2.6%.

Brandi Hoffine, a Treasury spokeswoman in Washington, couldn’t immediately be reached by telephone for comment.

Egan-Jones Ratings Co. last year cut its credit rating for the U.S. to AA-.

Treasury Secretary Jacob J. Lew told Congress that the extraordinary measures being used to avoid breaching the debt ceiling “will be exhausted no later than Oct. 17” and that the department will have about $30 billion to pay obligations.

“Congress has a lot of work to do in a short period of time and the consequences of their failure are very substantial,” Lew said Sept. 24 at the Bloomberg Markets 50 Summit in New York.

S&P and Egan-Jones have faced legal action from the U.S.

The Justice Department sued S&P and its parent McGraw Hill Financial Inc. in February, alleging the world’s largest credit rater inflated grades on mortgage-backed securities to win business from Wall Street banks. The New York-based company said in a Feb. 5 statement that the lawsuit is “meritless” and that it will defend itself “vigorously.”

Legal Disputes

S&P called the lawsuit “retaliation” for the ratings company’s downgrade of U.S. creditworthiness, according to a court filing earlier this month. S&P had maintained an AAA rating on the U.S. for 60 years.

Egan-Jones Ratings was barred from grading government debt and asset-backed securities for 18 months after settling claims it made material misstatements to the U.S. Securities and Exchange Commission.

Warren Buffett’s Berkshire Hathaway Inc. is Moody’s biggest shareholder with an 11.3% stake valued about $1 billion. Buffett told the Financial Crisis Inquiry Commission in 2010 that Moody’s sales are unaffected by investors’ opinions about ratings, calling the business a “natural duopoly.”

Buffett lent his appeal to President Barack Obama’s re- election campaign and the president named a tax-increase proposal after him.

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