S and P: Not the Best Judge of Credit-Worthiness

The media and the talking heads will no doubt make a big deal about S&P downgrading the U.S. debt from AAA to AA and threatening to go to A in 6 months.  But it’s really nonsense. The U.S. it is not possible for a sovereign nation with it’s own currency, it’s own central bank, and that borrows in that same currency to go into default.  I just heard Faux Fox News say this afternoon that this will cause all of us to pay higher interest rates on home mortgages and car loans!  Honestly, where do they get these people?  Fox claimed that your car loan and mortgage are “pegged” to the 10 year government bond rate.  Nope.  Not true.

Anyway, what we should be doing is taking another look at this whole bond-ratings scam.  Standard & Poor’s basically has a business model where they rate bond issues in return for fees paid by the banks selling those bonds.  There’s no reason or need for them to rate government issues except maybe for obscure municipal bonds where the information for an informed decision isn’t easy to come by.

So let’s recap how S&P has done in the past.  My favorite two highlights are Japan and Lehman Brothers.  In Japan, this is how interest rates (yields) on 10 year Japanese bonds have behaved since Jan. 2000:

It was in January 2001, right about when the yield hit it’s peak of 2.0% that S&P downgraded Japanese 10 year bonds indicating S&P thought the bonds were riskier and should pay an interest rate premium.  Kind of looks like Mr. Market and Ms. Investors didn’t agree.  Not having learned their lesson on the economics of sovereign debt, S&P did it again in January  2011 with another downgrade.  I think S&P needs to throw out their models and go back to school.

Now let’s look at the other side.  In September 2008, the day before Lehman Brothers filed for bankruptcy, S&P rated them “A”.  Two weeks later, even though Lehman had already gone bankrupt, S&P still didn’t get it and defended their rating:

“In our view, Lehman had a strong franchise across its core investment banking, trading, and investment management business,” S&P stated. “It had adequate liquidity relative to reasonably severe and foreseeable temporary stresses.”

Source: CFO Magazine












5 thoughts on “S and P: Not the Best Judge of Credit-Worthiness

  1. Pingback: The S and P Downgrade Decision Stinks of Politics and Corruption. « EconProph

  2. Pingback: The Market Shrugs Off Rating Downgrade, Market Is Worried About Real Economy. « EconProph

  3. It’s not just Faux/Fox News saying consumers will be hit w/ higher interest rates on mortgages and car loans. Public radio news shows are saying it too. NPR news, for example. But APR’s Marketplace Money was especially explicit. Here’s their New York bureau chief Heidi Moore, serving the show’s Wall Street expert:

    Moore: “It’s definitely going to be a little bit more expensive for us. If you have a mortgage, if you have a car loan, if you have a student loan — any kind of debt — you’ll probably see the interest rate tick up a little bit.”

    Vigeland: “And why is that?”

    Moore: “Well what has happened with the credit score being cut is basically we’re going to have to pay more in an interest rate to finance our debt as a country. And when the whole U.S. pays a higher interest rate, so does everyone in it. So if you have a mortgage, if you have a car loan, if you have a student loan, you’re going to see your interest tick up.”

    Interestingly, she slips into consumer credit lingo by describing the S&P rating as a credit score. And, as everyone can see — especially now that it’s in writing — she just repeats her opening assertion when she’s asked to provide an explanation, some kind of a link [in the pre-web sense of the word] between this S&P rating & consumer interest rates. But she provides no link. Instead, she obscures the relationship by using the word “basically” — which, I hate to say it, is the way people talk when they don’t know what they’re talking about.

    (A friend of mine has an expression that he uses when he catches himself talking like this — he’s says that he’s just talking out of his butt. And then he laughs it off. We all do it from time to time, of course. But nowadays it seems like just about everyone is doing it. But nobody is stopping themselves. And nobody is laughing.)

    • Yes. I think I agree with your friend’s description. It’s just talking out their …..
      Unfortunately this is the level of ignorance we get in a lot of our media reporters about most macro economics topics, not just the S&P rating. ;-(

  4. Rob a bank and you get 10 years The Bank robs you and they get a seven figure pension.

    Factors that contribute to rioting are population size, the breakdown of respect for social order, poverty, the lack of opportunities for personal advancement and Debt.

    Today the people that led the world into debt by their corrupt practises within the Banking, Insurance, and Financial sector have been reappointed by President Obama to head his financial team. No one has been brought to justice for the debt all the world is now paying and rioting about.

    All the banks had AAA status just before they collapsed from Standard and Poor the same people who have just downgraded USA economy?

    University Professors who advised the governments were working without declaring their paid interest for these corrupt banks etc. just before the crash.

    If you check the facts you will find a transfer of wealth from the poorest to the top one percent and these crooks are still running all our economies.
    This was achieved by getting companies like standard and poor to give false assessments of bad debt which was then sold to our pension funds as triple A.
    Whilst ever these crooks go unpunished and are rewarded by huge golden handshakes and top government jobs, riots will get worse.

    We all have a remedy it is our vote and a free press.
    Make sure you give your vote wisely and all the politicians who supported crooked bankers, insurance companies, are swept from power.
    To the press it is time to expose these crooks. Name and Shame

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