Anyone that follows my Blog knows I’m no fan of the Obama Administration’s financial policy but I have to agree with them this time in their assessment of the credibility of S&P with their downgrading of the US credit rating. Trusting an S&P credit rating is like accepting investment advice from Bernie Madoff. Both have proven to be equally unreliable over the past five years.
First, S&P is the only one of the Big Three credit-rating agencies (CRAs), (the other two are: Moody's Investor Service and Fitch Ratings), to take this unprecedented step to embarrass and slander the credit worthiness of the United States.
Second, what is the definition of the highest AAA rating from which the US was just downgraded from to AA+? AAA: best-quality borrowers, reliable and stable (many of them sovereign governments)
A trivia question: what do ALL the countries that still have an across the board AAA Rating have in common? Hint: They are Australia, Austria, Canada, Denmark, Finland, France, Germany, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland and the United Kingdom (and separately Guernsey & Isle of Man).
Answer: They all depend on the United States for protection and it is that very blanket of protection that even enables their economies to exist yet they now enjoy a higher credit rating than the country that secures their very existence. Now that’s ironic.
So exactly which of these AAA Rated countries does S&P really believe is more “reliable and stable” than the United States? Also, why does S&P think the entire World flocks to US Treasury instruments as their safest investments in times of uncertainty? Is S&P really smarter than not only the other CRAs but also all the other investors in the World? Regardless of what’s been happening in Washington over the past quarter, does S&P really believe the US has a chance in Hell of defaulting on any of its debt obligations? The AAA Rating is supposed to evaluate the safety of the investment and nothing else.
With all this said, let’s examine the recent S&P track record. S&P has taken some well earned criticism in the wake of large losses beginning in 2007 in the collateralized debt obligation (CDO) market that occurred despite S&P assigning their top AAA credit ratings to large portions of even the riskiest pools of loans. Investors trusted the low-risk profile that an S&P AAA implies and purchased large amounts of CDOs that later became unsellable or those that could be sold took staggering losses. For instance, losses on $340.7 million worth of S&P AAA rated CDOs issued by Credit Suisse Group added up to about $125 million. To quote Time Magazine: S&P “granted AAA rating to Collateralized Debt Obligations (CDOs) that were chock-full-of crap mortgages, thereby helping to precipitate the 2008 financial collapse” and The Washington Post put it a little more bluntly: "Standard and Poor's didn't just miss the bubble. They helped cause it."
Because companies pay S&P to rate their debt issues, S&P is beholden to these issuers so its ratings are not always objective. Now with this US downgrade, I believe S&P is causing further damage for its own agenda. Add to that S&P even acknowledges they made a $2 Trillion (that’s with a “T”) Math error in its justification for downgrading the US credit rating so I have to agree with the Treasury Department that "A judgment flawed by a $2 Trillion error speaks for itself." S&P is not only “The Gang That Can’t Shoot Straight,” they can’t even add straight yet here a bunch of “unidentified” company employees have made an arbitrary decision that could adversely affect the lives of 300+ Million Americans. Not only are they not elected by the public, they are not accountable for their decision making process, have a dubious track record to say the least and there is no appeals process against their credit-rating decisions.
I strongly urge Congress to hold hearing as soon as possible to examine the decisions of all the CRAs but especially S&P and while they are at it, the inquiry needs to be expanded to determine S&P’s liability in the CDO fiasco. I suspect the result will be they are as responsible for losses as any of the financial institutions that issued these worthless instruments so should be financially responsible to investor for losses resulting from any investment decision that relied on an S&P AAA ratings.
One final comment, S&P is a Division of McGraw-Hill and is run by Harold Whittlesey "Terry" McGraw III (born 1948) who is the chairman, president and chief executive officer (CEO). McGraw’s total 2009 compensation was $5,905,317 ($1,390,500 Base Salary +, $1,261,000 cash bonus + $924,060 stock granted + $1,854,583 option grants + $475,174 other compensation) while everyone else was losing their shirts over the CDO melt down he was responsible for causing. Where’s the justice? One final insult, born in 1948, “Terry” was of prime draft age during the Vietnam War yet was a successful Draft Dodger!
I can only deplore the slander heaped upon my Country by Standard & Poor’s so maybe they should be renamed: “Slander and Boor’s”