Posted by Ray on August 8, 2011 under Main | 
I had made a prediction last year, found HERE, that US Treasuries would be put on negative watch by Fitch and downgraded to junk by China. Well, I was wrong as it was S&P who made the call and actually did downgrade the US to AA+ which is still a joke as the government will never be able to actually repay much of the $14T it has outstanding without just printing money, which IS a form of default. China is now saber rattling about the US dollar again, but this time they are serious, I think at least, asking for a new reserve currency and I think they will get what they want as other countries have raised the same concerns.
The US deserved to be downgraded and we should be downgraded much further than AA+ as we will not get serious about debt reduction. To prove my point all we have to do is look at how the debate is structured. The politicians are all talking about annual deficits and NOT the outstanding debt load. They do all sorts of double talk to make sure the average person only believes we have a trillion or o in outstanding debt, but that trillion is just the annual deficit and no one talks about the big number of $14T in outstanding current liabilities. S&P gets it and that is why they are the first one to downgrade the US.
When the downgrade happened the Treasury Department acted quickly calling the move unjustified, political, terrible lapse of judgment, S&P made a mistake, and these are the same people who rated junk bonds AAA to begin with. While it is easy to criticize S&P for their prior actions, but relative to its sovereign debt ratings those arguments hold no water and anyone with a stitch of unbiased rationale realizes that the US is indeed in big trouble and we do not deserve a AAA rating. The worst part about this downgrade is the fact that the government is now baring down on S&P about this downgrade.
It was just announced that the Senate Banking Committee will be looking into the downgrade. While we do not know if hearings will happen or not the person close to the matter did say all options are on the table. I was under the impression that Congress wanted independent ratings agencies along with an independent Federal Reserve. Silly me I guess as the minute a ratings agency does the right thing they try to crush it with Senate investigations, but the Federal Reserve can monetize trillions in US debt without Congress blinking an eye, unreal.
What Congress is saying is be independent as long as you do what we say and want and if you decide to think for yourself, well, we will hunt you down and skin you alive. The government is acting very much like the old Soviet Union and is sending a message, not matter what we do keep us rated AAA. How can a ratings agency offer an independent review of a security if the government demands that it gets what it wants regardless of what the facts are? It is insane to think that the ratings agencies will remain independent if Congress has investigations if the US is downgraded. Frankly, this is extortion, blackmail or a combination of the two since the government is the one who issues S&P with its ratings license. Will S&P lose its license over this? I do not know, but it is possible and shameful if that is what happens.
As an American you should be angry over the downgrade, but not at S&P. You should be angry at the people who rubberstamps every bill that comes along wasting billions of dollars. You should be angry at their inability to work with each other and address the seriously obvious structural issues that will consume immense amounts of capital in the coming years. You should be angry that the Senate wants to investigate S&P while saying other quasi government agencies are left alone even though they are part of the problem. You should be angry that Alan Greenspan, Mishkin, Bernanke and every other clown out there says the US will never default because we can print our own money to pay the debt, devaluation IS a default.
You should NOT be mad at S&P and you should demand that Congress work on real problems because their lack of dealing with those problems is exactly why S&P downgraded them to begin with. We are not showing the world that we are capable of fixing any real problems. What we are showing the world is that if we do not get our way we will simply create problems were none exists and threaten the “trouble maker” with depriving them of their livelihood or by throwing them in jail. Way to go America.
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Tags: big trouble, debt load, debt ratings, debt reduction, default, Investigation, judgment, junk bonds, politicians, printing money, reserve currency, S&P downgrade, senate banking committee, sovereign debt, treasuries, treasury department
Posted by Ray on April 14, 2010 under Main |
Since the meltdown last year much attention has been paid to how rating agencies determine the difference between AAA and junk paper. In a nutshell, and as you already know, the agencies gave AAA ratings to paper that was literally worthless and according to several books I have just read it is clear that the agencies had no idea how these debt instruments actually worked, I am referring to CDO and asset backed paper. Therefore, I humbly submit this new, simplified, rating system to the SEC and the ratings agencies.
My rating system will clear up any confusion as to the safety of the bonds you buy and investors will be fully aware of the risks. I am confident my recommendations will be turned down because the last thing Wall Street wants is transparency or to give the average (or institutional for that matter) investor a shot of actually understanding the risk they are assuming when they buy fixed income. I mean, what kind of fun could we have if AAA rated paper was actually safe? I am assuming Wall Street likes the fact that they can game the system and make total junk into AAA, which is exactly what they did with ABS. The last thing they want is for investors to make money because that would mean there is less money for them to make, right Goldman?
So, here is my proposed rating system:
AAA – Will now will be called “we think you will get your money back”
AA – Will now be called “we are somewhat confident you will get your money back”
A – Will now be called “you probably will not get your money back”
BBB – Will now be called “crappier”
BB – Will now be called “total crap”
B – Will now be called “are you freaking serious?”
CCC – Will now be called “what, do you hate your money?”
Unrated – Will now be called “there is a sucker born every minute, congratulations you are the sucker”
After reading so many stories about the financial crisis there is one thing that is consistent, regardless of who is telling the story or what context that story is being told, the ratings agencies had no idea what they were doing. In fact, in The Big Short, I highly recommend that book, there were several accounts of money managers talking to the ratings agencies and they said they were totally clueless. They went on to say that their models could not even calculate negative returns, how is that possible? No one at the biggest agencies had any idea how CDO’s or asset backed securities were created. They had no interest in looking at the makeup of what was sub-prime and what was not. They never looked at individual loans and instead used an “average FICO score,” how could you give a AAA rating when you did not look at the instruments backing the bond? These agencies are clueless and they still have no clue.
Sure, they are now downgrading this junk paper, 2 years later, but where were they when defaults were at 4-5%? This is why I am confident that the U.S. and the U.K. will keep their AAA rating right up until the day these countries are in receivership. After all, past actions do dictate future results. For example, Did AIG keep their AAA rating pretty much right up until they were acquired by the government? How about Freddie and Fannie, by the way there was never a government guarantee to this debt, it was merely implied, read a prospectus if you don’t believe me, did they not keep a AAA rating until the end? Then there is Executive Life, an insurer in the early 1990’s that collapsed with the help of Michael Milken’s junk bonds, which kept their AAA rating right until they were in receivership. Executive Life was downgraded only after receivership.
These firms cannot foresee risk or rate risk properly. After lawsuits were filed these firms defenses revolved around “free speech” and not around actually rating risk. Seriously? They now admit that one needs to do their own research and not trust their ratings alone. This must be news to all the insurance companies or pension funds that can only invest in A to AAA paper only. What they are telling you is that their ratings are not real and must have been always been fake. So, how can you trust their ratings on such things as sovereign debt? One simple question, do you think the U.S. will ever actually pay off its debt, all $12T worth of their debt? Not a chance, but they keep the U.S. at AAA and that is why their ratings are a joke.
P.S. – Sorry for the bad attempt at humor, come on, I am a geek, what do you expect?
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Tags: aaa, bonds, cdo, credit rating agencies, debt instruments, financial crisis, Fitch, junk bonds, Moody's, risk, S&P, there is a sucker born every minute, wall street
