Standard & Poor’s downgrade of United States government debt last month has been much debated, but not enough attention has been devoted to the fact, reported last week by Bloomberg News, that it continues to rate securities based on subprime mortgages as AAA.Yes, more than a soupçon. I would say S&P's playing with AAA ratings more properly reeks of corruption and criminality. As Simon Johnson points out: you get what you pay for. The big banks want AAA on subprime mortgages, so S&P mysteriously finds these are rock-solid, gold-plated investments. The US government is run by a Democrat, and suddenly S&P smells "socialist" and decides that nobody can trust the US to repay its debts. I bet if Ben Bernanke fronted a little anonymous cash under the table, those AAA ratings would suddenly reappear. You know, wink, wink, nudge, nudge, the US is very close to AAA and those analysts at S&P might "spontaneously" have a change of heart and discover that the US really is a more solid bet than a subprime mortgage. Thank God Wall Street has no criminals... the lot of them are all solid, like choirboys, as honest as the day is long.
In short, S.&P. is suggesting that these mortgages are more creditworthy than the United States government — a striking proposition. Leave aside for a moment that S.&P. made a big mistake in its analysis of the federal budget (as explained by James Kwak in our blog). Just focus on all the things that can go wrong with subprime mortgages: housing prices can fall, people can lose jobs, the economy may fall into recession and so on.
Now weigh those risks against the possibility that the United States government will default. As we learned this summer, that is not a zero-probability event — but it would take either an act of Congress, in the sense of passing legislation, or a determination by members of Congress that they could not act. S.&P. finds this more likely to happen than some subprime mortgages’ going bad.
Now S.&P. might be right, of course. Or its assessment might be influenced by the fact that it is paid by the issuer of those mortgage-backed securities — which presumably wants a higher rating. The rating agency’s employees may want to do an accurate assessment; management can reasonably expect to make higher profits if its ratings please the paying customers.
Saturday, September 10, 2011
A Soupçon of Criminality
Here's a bit from a post by Simon Johnson on the NY Times blog Economix raising a suspicion about the motives of S&P and the way it "grades" investment risks: