Did you know S&P has a political agenda? Of course you do.
But read this anyway. The Minyanville financial blog gave the Center for Public Integrity space to write about S&P, and you should be interested.
In April 2002, Georgia Gov. Roy Barnes won legislative approval for a law to hold Wall Street accountable for bankrolling predatory lending. After the Democrat lost re-election that fall to Republican Sonny Perdue, the finance industry launched an all-out assault on the provisions of the law that held mortgage investors liable if they bought fraud-tainted home loans.
One of the defining moments in the legislative fight came when Standard & Poor’s, the giant debt rating company, announced it would no longer rate securities that might be backed by loans covered by the Georgia law, raising the specter that investors would cut off the flow of money into the state’s mortgage market and cripple its ability to provide credit to homeowners.
Now, some would wonder why a debt rating company would defend predatory lenders. In fact, wouldn't such lenders make the job of rating debt more difficult? But those who are wondering are unaware of the extent to which S&P willfully rated the mortgage backed bonds containing predatory loans as AAA. S&P was in on the game, made quite a bit of coin from the game, and the originators of those garbage loans were S&P's best customers. So of course they backed them to the hilt.
And further:
Despite their power over world economies, credit rating agencies are private enterprises, with no prohibition on lobbying at either the federal or state level. An analysis of data collected by the Senate Office of Public Records revealed:
* The three firms spent more than $10 million combined on federal lobbying since the start of 2002. Moody’s was the most active, spending about $7.3 million on lobbying, followed by Fitch with about $1.8 million, and S&P with about $1.5 million.
* The companies' spending on lobbying has increased significantly since 2008, totaling over $6 million. The increase was mostly driven by Moody’s and Fitch; S&P has remained relatively consistent.
* While the three companies do not have political action committees, individuals working at these agencies have contributed about $190,000 to political causes since the start of 2005. The top recipients of those contributions: President Barack Obama (at least $33,000), former Democratic Rep. Joe Sestak and the Democratic National Committee (at least $17,000 each), the presidential campaign of Sen. John McCain (at least $16,900), and the various campaigns of Hillary Clinton (at least $12,500), now the Secretary of State.
Much of the increase in lobbying from these agencies came during the fight over the Dodd-Frank financial reform bill.
“The rating agencies were visiting every office,” said Marcus Stanley, a former U.S. Senate staffer who is now policy director for Americans for Financial Reform, which advocates for tougher financial regulation. “They knew that their profits were at stake.”
And
A report released in April by the U.S. Senate Permanent Subcommittee on Investigations concluded that S&P and Moody’s engaged in a “race to the bottom,” providing favorable ratings on high-risk mortgage-backed securities in exchange for lucrative paydays from Wall Street.
The sapient Nate Silver over at 538 has done some of his regression analysis on S&P's history of rating countries, and the results are not pretty. In an article titled "Why S.&P.’s Ratings Are Substandard and Porous" (kudos to Nate for the punning), Nate observes the following:
- In 2006, S&P rated Ireland as a AAA credit risk. Today, they have double-digit interest rates and a roughly 40% chance of default or equivalent in the next 5 years per the debt insurance market. S&P didn't downgrade Ireland until 2009, after the debt insurance market had already raised the price to insure Irish bonds tenfold in a year.
- In 2006, S&P rated Spain as a AAA credit risk. Today, the debt insurance markets give Spain about a 30% chance of default or equivalent in the next 5 years - and yet S&P still has them at AA, higher than Japan.
- Iceland, which came close to total national bankruptcy, was rated AA+ in 2006, which matches the rating of the United States now
- Greece, which is in the news quite a bit as desperate efforts are made to stave off a debt default, was rated A in 2006.
- S&P's ratings correlate quite closely to the Corruption Perceptions Index of Transparency International. Which suggests that their ratings are not so much based on observables of finance as perceptions of political goodness
- S&P's national debt ratings as of June 30, 2006, correlate very weakly with the debt market's price to insure that debt today - in other words, S&P is not much better than throwing a dart at a map in terms of predicting which countries will have debt problems
- S&P tends to perform downgrades, or upgrades, in slow steps. Which means they are pretty much a trailing indicator, not a predictor
The anonymous blogger at Economics of Contempt has dealt with S&P for decades, and pretty much says that compared to Fitch's and Moody's (their prime competitors), they are morons.
No, S&P was flat-out wrong — no caveats. They are, to put it very bluntly, idiots, and they deserve every bit of opprobrium coming their way. They were embarrassingly wrong on the basic budget numbers, as everyone knows now, so they were forced to remove that section from their report, and change their rationale for the downgrade. (Always a sign that you’re dealing with hacks.)
S&P’s rationale for the downgrade now is based entirely on their subjective political judgement — and their political judgement is wrong. The brilliant political minds over at S&P said that “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”
That sounds like a Very Serious and Sober assessment, but it’s really not. It’s true that the debt limit debate was ridiculous, and that a large contingent of Tea Party freshmen in the House were threatening to not raise the debt ceiling. But here’s the thing: we still raised the debt ceiling, and in such a way that this Congress won’t have the opportunity to use the debt ceiling as a political bargaining chip again.
And closes with this gem.
I’ve seen S&P make far more basic mistakes than the one they made in miscalculating the US’s debt-to-GDP ratio. I’ve seen an S&P managing director who didn’t know the order of operations, and when we pointed it out to him, stopped taking our calls. Despite impressive-sounding titles, these guys personify “amateur hour.” (And my opinion of S&P isn’t just based on a few deals; it’s based on countless deals, meetings, and phone calls over 20 years. It’s also the opinion of practically everyone else who deals with the rating agencies on a semi-regular basis.)
Treasury has every right to be outraged. S&P mangled the economic argument so badly that they had to abandon it entirely, and then fell back on a political argument which they are in no position to make, and which isn’t even correct.
So to S&P, I say: you should be ashamed of yourselves, and I truly hope this is your downfall.
So - incompetent; useless; politically active on the side of criminals.
And their entire business model is predicated upon the fact that the US Government says that bonds have to be rated by somebody, and right now somebody is one of [ S&P, Moody, Fitch ].
My proposed solution? The USG takes over the job of rating bonds. In fact, Al Franken proposed that during last year's financial reform debate, but it got dropped in committee.
And S&P, Moody, and Fitch can go try to sell their "analysis" to people who don't have to buy it. I'll give S&P a nickle to not tell me what they think - I can invest better without them.
The SEC is proposing regulations of the rating industry - specifically, that when they make a big mistake, they have to reveal it.
Standard & Poor's, whose unprecedented downgrade of U.S. debt triggered a worldwide stocks sell-off, is pushing back against a U.S. government proposal that would require credit raters to disclose "significant errors" in how they calculate their ratings.
... SNIP ...
He (ba: S&P President Deven Sharma) said S&P's own error correction policy "has proven to be effective and, where errors have occurred, our practice of reacting swiftly and transparently has benefited the market."
Barbara Roper, director of investor protection for the Consumer Federation of America, said that policy has proven inadequate.
"What was their correction policy on their Enron rating? What was their correction policy on their Lehman rating? What was their correction policy on their Bear Stearns rating? They don't have an error correction policy -- they have an error denial policy, and the SEC is absolutely right to step in," Roper said.
Is it too much to ask that people whose opinions can cause billions of dollars to change hands actually know what they are talking about?