Sunday, August 7, 2011

The S&P Sucker Punch

Kenneth M. O’Brien

If ever there was a situation that called for widely publicized hearings by the U. S. Senate it is the action by Standard & Poor’s to downgrade the debt of the United States.

To assume that S&P is some kind of independent, wholly objective watchdog is absolutely naïve and foolish.

Months before as well as within days of the announcement of the action by S&P to downgrade the debt of the United States from AAA to AA+, conservative media outlets began putting forward arguments that the action was not politically motivated. Forbes Magazine and Fox News’ Huckabee program were in the forefront of such arguments.

Have any of you seen articles saying that the action by S&P was political (i.e. anti – Obama)? Not yet. I believe that I may be among the first.

Therefore I found it curious that such propaganda outlets for the corporate agenda were coming out in defense of an argument that had yet to be made.

The most important thing to remember in this discussion is that Standard & Poor’s is a business. It is a division of McGraw Hill Publishing.

Also important to keep in mind is that it is only one of three major bond-rating agencies. The other two are Moody’s and Fitch. Both of these agencies still give U.S. debt their highest rating. In fact, if you look up the bond ratings of Massachusetts’ communities, you will find that those ratings are determined by Moody’s, not S&P.

The reliability of Standard & Poor’s as well as other agencies was called into serious doubt as a result of the financial meltdown of 2008.

As summarized by Wikipedia, “CRAs [Credi Rating Agencies] such as S&P have been subject to criticism in the wake of large losses beginning in 2007 in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the CRAs.

Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of loans. Investors, trusting the low-risk profile that AAA implies, purchased large amounts of CDOs that later became unsellable. Those that could be sold often took staggering losses. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by S&P.

Companies pay S&P to rate their debt issues. As a result, some critics have contended that S&P is beholden to these issuers and that its ratings are not as objective as they should be.”

The same article goes on to note “In November 2009, ten months after launching an investigation, the European Commission (EC) formally charged S&P with abusing its position as the sole provider of international securities identification codes for U.S. securities by requiring European financial firms and data vendors to pay licensing fees for their use. "This behavior amounts to unfair pricing," the EC said in its statement of objections which lays the groundwork for an adverse finding against S&P. "The (numbers) are indispensable for a number of operations that financial institutions carry out – for instance, reporting to authorities or clearing and settlement – and cannot be substituted.”

S&P has run the CUSIP Service Bureau, the only International Securities Identification Number (ISIN) issuer in the US, on behalf of the American Bankers Association. In its formal statement of objections, the European Commission alleges "that S&P is abusing this monopoly position by enforcing the payment of licence fees for the use of US ISINs by (a) banks and other financial services providers in the EEA and (b) information service providers in the EEA." It claims that comparable agencies elsewhere in the world either do not charge fees at all, or do so on the basis of distribution cost, rather than usage.”

Despite these failings, it still does not provide a rationale for assuming that the actions of S&P are self servingly politically motivated.

To understand that, you have to be aware of provisions of what is known as the Dodd-Frank Financial Reform Act.

This is a bill that was adopted to correct the activities that gave rise to the financial crisis of 2008.

Opposition to this bill has become a cause celebré among business interests, conservatives and Republicans.

Most well-known is the controversy that has arisen over the intent to appoint Harvard Professor Elizabeth Warren to head the Financial Consumer Protection Agency provided for in the legislation. When the Obama Administration withdrew this name and submitted the name of Richard Cordray, former Ohio Attorney General, Republicans let it be known that they would not approve any nominee to fill the position.

Aside from limiting the variety of (highly profitable) Wall Street excesses that contributed to the near world-wide financial collapse, there is a provision that directly affects the private credit rating bureaus,

Essentially the law would make the credit ratings agencies responsible as “expert advisors” and impose potential liability in the event of such gross errors as cited above in regard to collateralized debt obligations which they were paid to rate by the issuers of those debt instruments. Gee, don’t you think that Iceland, which was bankrupted by such misrepresented investments would like to have such recourse?

Clearly S&P has a financial interest in undermining the legislative agenda of the current Administration, What better way to do that than by lowering the credit rating of the United States for the first time in history?

Of course there is still the potential accusation that the allegations that I’m making are on the fringe.

Well, I guess that I have to turn to history to provide further validation of my argument.

Let’s turn to the case of Britain which, according to S&P still maintains a AAA bond rating.

Daily Finance reported in 2010 that “Standard and Poor’s Rating Services affirmed the U. K.’s soveriegn credit ratings Monday, but said its outlook remains negative. The pound sterling slipped on the news . S&P’s outlook has been negative since 2009.”

Subsequently, the liberal Labour government of Gordon Brown was defeated. The coalition government headed byConservative party candidate David Cameron has introduced a series of austerity policies that have been widely acknowledged to limit the prospects for economic growth in the short and intermediate term.

In my opinion, S&P is using its influential, but misunderstood, role as an arbiter of credit worthiness to influence public policy for its advantage. Part of this is the corporatist agenda to create a narrative that will bring about the defeat of President Obama and other Democrats in 2012.

The author is a former Director of Market Research for the American Stock Exchange.


  1. The S&P did exactly what they should have done and exactly what they said they would do. The Republicans are spinning it and I knew they would. The fact of the matter, and you have to be paying attention to what the S&P is saying and not saying, is that this is a vote of no confidence in Congress. Since Congress is controlled by the Tea Party and the Republican Party this is a vote of no confidence in the Tea Party and Republican Party. The S&P wanted to see revenues as part of a deficit reduction and they wanted to see it geared toward long term reduction and not near term. This is really a bitch slap aimed at the Republicans and it can be easy to miss and it's easy to spin because it's a nuanced bitch slap meant to be understood by the leadership of the political parties. It's old fashioned politics. Take an action that the people it's aimed at fully know why it's being done, but that bystanders won't fully understand. Regardless of how it's spun it's a bitch slap at the Republican Party and they say whatever they want they know the meaning.

  2. Why is the right so much better at framing the debate than the left? Why are Democrats known for being pro-tax, rather than Republicans known for being anti-revenue?

    I just think China is right about us; we need to cure our addiction to debt. I just want to make sure we do it in a way that is both responsible and fair.

  3. Btw, Ken, you'd like this book:

    I am enthused to see there's a DVD edition now! I'll have to see if I can get my hot little multipartisan hands on it.

  4. Jim:
    I have to respectfully disagree.
    In comparison to, say, Britain, the downgrade is not justified.
    Further, S&P acknowledged the Administration’s observation that their analysis had made a $2 trillion error. Nevertheless, they stood by their action.
    While their report does spread the blame around, that constitutes little more than plausible deniability.
    They are well aware that their action will lead to the narrative in the 2012 campaign that Obama was the first chief executive to preside over the downgrading of U S credit.
    All the fine points of their report will be ignored or forgotten by 85% of the electorate.
    We’ve already seen this with the belief of most Americans that the stimulus program was a failure or that we have a spending problem not a revenue problem.
    Their ultimate goal, as I maintain, is to see a Republican victory so that the Dodd-Frank bill will be either repealed or dramatically scaled back. This will allow them to escape what would otherwise be oversight and liability that would threaten both their means of making money as well as their role in an oligopolistic triumvirate that is currently unregulated despite its worldwide influence.

  5. Obama is just a big old dope and the whole economy is his fault. It is always, always the fault of the president (see G. Bush the 1st).

    Adios Obama, make way for Mitt Romney.

  6. I mean, I just don't see slogging through a total of four years of ineptitude and then somehow blaming the republican congress for the quagmire we can't seem to extricate ourselves from. It is Barry's fault, because a lot of voters don't get the nuance mentioned earlier.

    You wait until the Repubs have the White House and the Congress. Goodbye Great Society, hello Brave New World!!

  7. A cop on every corner,

    A sailor in every country!!!

    We will be scary again!!!!!!

    This Tea Party is going to start looking less like a party and more like one of them WWF rasslin' matches. Or maybe a couple of really hot chicks all juiced up on steroids, trying to kill each other in a vat of jello (or something like that). Anyway, you can forget "Kumbaya" and all that namby pamby crapola. We will make America scary again!!!!!!

    Have a nice day.

  8. The only thing that's truly scary is people like you!

  9. Hey Ken,

    Now that dope Tim Geithner is trying to quit and Barry is practically begging him not to (please, please don't leave me now!!!).

    This week, you get Barry, Tim G., and that other dope Ben Bernanke trying to figure out what to do with this runaway train.

    BTW, the thing I like about Romney is his business experience. I'd rather have an MBA as president than a community organizer.

    All the jobs shipped off to India, and all our money is in China......

  10. Peeps:
    Which President with an MBA?
    Do you mean Dubbya?
    Or, perhaps we should look back at the last business men Presidents.
    As I recall, the most accomplished businessman to serve as President was Herbert Hoover.
    Your ignorance is exceeded only by your passionate ignorance.

  11. the borrowed buck stops with ObamaAugust 7, 2011 at 6:22 PM

    As individuals we are rated by the big three credit bureaus and none of them rate our credit the same way. Therefore our credit ratings amongst the three credit bureaus usually result in three different scores. To have one lower then the rest is not uncommon. Especially if your debt ratio is out of whack with your income like this countries budget is.

    Unlike David Axlerod - who is blaming tea party republicans for the downgrade - this country should be celebrating the fact that fiscal accountability was called for and the very begin steps to reign in our countries credit ratio has begun.

    what are those steps - well if it were you and I it would be :
    (from debit repair for dummies)
    What a Budget Can Do for You
    A budget is a plan for spending the income you have, building savings and using credit wisely. In short, a budget allows you to control the direction of your financial future. Here’s a list of things a budget can help you do:

    Reach your life’s goals. First figure out what your priorities and goals in life are, then work out a realistic saving and spending plan that helps you achieve those goals.

    Calculate how much your regular expenses are. Allocating money for every expense puts you in control of your money, deciding how your money’s used and helping you pay your bills on time. You have the power to make better decisions on how you spend your income.

    Know just how much your regular income is. The amount you actually earn after tax may be less than you think. So, unless you change jobs or take a second job, you need to live within your means. By bringing spending in line with income, you ensure you don’t accumulate unmanageable debt and risk your good credit standing.

    Prepare for unexpected events. An expected cost, such as a large dental bill, can blow your budget. To lessen the pain, it’s wise to budget for emergencies.

    Get and stay out of debt. Because budgeting brings expenses in line with income, your debt level falls. Making regular payments can get you right out of debt.

    Build your credit. Pay off the balances on your credit cards, for example, and both your available credit and financial standing go up.

    Reduce stress. Gaining control over your finances relieves the constant worry over money, which can cause sleepless nights, reduced productivity at work and, at worst, family breakdown.

    Stay healthy. By making provision in your budget for health insurance cover, you can take advantage of health benefits for yourself and your family.

    Look forward to retirement. By calculating how much you’ll need when you retire and at what age you’re going to retire, and then putting money into super, retirement need not be something to dread.

    Our country should be run no different.

    Obama's policies do not represent anything like the above steps. This countries deficit spending has gotten MUCH worse under him. THEREFORE THIS DOWNGRADE IS TOTALLY OBAMA"S FAULT! A fault that will take the terms of 2012, 2016 and possibly 2020 or longer to correct. SO ... Get used to hearing It's OBAMA'S FAULT because it is. He owns this downgrade because to a great extent he caused it.

    His Spending policies have far out done others who granted also added to this situation but he outright owns this downgrade by over spending all the previous ones combined. He has spent all of his political capital and rightfully so the credit bureaus are calling in his notes. Something I hope China doesn't do.

    To all those "give him time" people - have you had enough of hope and change yet?

    I certainly have! No hope and barely any change left to give to my grand kids to pay off all this debt.

  12. Something that the economist have been oblivious to for the last three decades is that our money is no longer a tangible asset that has real value even when the government fails, or fails to be responsible.

    A silver dime with no numismatic value is worth almost $3. in 1968, a party from outside the US could buy ounces of gold for $35. today it cost 48 times more-$1688.

    Is the problem really excessive borrowing? It is a fiat currency, and has been for over 40 years. The Dollar has been backed up by our Dollar being something of historic value, and of course our Military strength hasn't hurt, although paying it off will hurt for additional decades.

    One theory is that a weaker dollar will make it easier to pay the Chinese, British, & Japanese off but is we want to stop the endless fiat related dissolving of our money, we can get back on the Constitutional path and dissolve the Federal Reserve instead, and once again allow our treasury to print "United States Notes" backed up by silver & gold, just like our founding fathers intended.

    Wow, real money-what a concept!

  13. I believe that the rich republicans that own 9/10ths of the US stock market are manipulating things to make sure Barry loses. They are the same ones that are keeping Area 51 a secret from the rest of us.

    If you vote for the MBA Mitt Romney, not only will the market go up, but the unemployment rate will shrink down to 3% and the aliens will be free to open their own version of an In and Out Burger.

    Who says republicans can't have fun? It's the democrats that can't have a good time.

    And by the way, maybe the credit rating was lowered not as part of someone's agenda, but actually because our economy is heading into the toilet? Any possibilities? Or is it not possible to criticize the government without it being agenda driven?

    Just not smart enough to figure that out, but I am almost sure about the Area 51 coverup.


  14. Peeps, you crack me up. Let's have a beer sometime, yeah?

  15. Amelia,

    So John Kerry goes into a bar in Boston and orders a beer, and the bartender says "why the long face...."

    Hee, hee, Democrats don't know how to party.

  16. Amelia,

    When I saw you talk about chloramines at citizens forum, I was wishing you were the chairman instead of the angry woman currently in the seat.

    I like smart people, and one day we will have a beer.

  17. @Peeps I *still* haven't seen that shenanigans, because I'm not a cable subscriber. Glad to hear I came across well, however. I hope to see it myself eventually.


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