Rating Agencies: Conflict of Interest

Posted by on July 26, 2011 11:34 pm
Tags: , , , , , , , , , , , , ,
Categories: National Debt The Nation

Standard-PoorLEE’S SUMMIT, July 26, 2011 – The Investment Rating Companies like Standards & Poor and Moody’s need to stay out of the political fray and keep their comments regarding the debt ceiling debate to themselves.  S&P walked away from a quote this morning on the news that was attributed to “… an influential investor met with S&P and was told that if the Boehner plan passed it may still downgrade America’s Treasury Bonds (our debt)… but that if the Reid plan was passed that was less likely.”

The “influential” investor was not mentioned by name: but it was given significant credence and coverage in the news media.

The Wall Street Journal reports that [S&P: Reports That It Endorses One Debt Plan “Not Accurate”].  They quote the official news release from the rating company , “Standard & Poor’s has chosen not to comment on the many and varying proposals that have arisen in the current debate.”

In reality and at the foundation of the statement is a factual misrepresentation of the actions taken by both Moody’s and by S&P over the last few weeks.

Current Examples:

New IMF chief urges U.S. to increase its debt limit

Credit rating agencies such as Standard & Poor’s and Moody’s have warned that they will downgrade the United States’ top credit rating if an agreement isn’t reached. Standard & Poor’s has also said it may reduce the nation’s credit rating if there aren’t steep cuts to the U.S. budget deficit.

Griffith talks to WSLS about the debt ceiling debate

WARREN: “There’s some talk that the Boehner plan would not be enough for Standard and Poor’s, and the other ratings agencies to allow us to maintain our Triple A bond rating.  How much does that weight on your decisions making?”

Deal or no deal? US downgrade looking likely

Standard & Poor’s warned earlier this month that there was a 50-50 chance of a downgrade, if Congress and President Obama failed to find a “credible solution to the rising U.S. government debt burden.” S&P said it may cut the U.S. rating to AA within 90 days. Passing a $4 trillion agreement could prevent a downgrade, S&P said.

I only had to go back 40 minutes from the time of this post to show that S&P has been leading the charge trying to tell American Politicians what the will, and what they won’t accept; further threatening to downgrade the U.S. Debt from Tripple-A to Double-A.

My fundamental question is: Why are these agencies getting into the act?  Is it out of the kindness of their heart?  Or, is there another reason?

In the book Reckless Endangerment by Gretchen Morgenson and Joshua Rosner they clearly link the role that the Rating Agencies had in creating the mess we’re in right now.  S&P supported the Sub-Prime mortgages because they could make money from the rating of the securitized mortgage investments.  Moody’s went as far as telling Georgia in the first half of the last decade that if they passed the best and toughest law against “Predatory Lenders” (passing the liability for the crime through the entire chain to the investor as well) that they [Moody’s] would not rate the Securities that included loans originating in Georgia.

What that meant was that Georgia would lose the ability to obtain cheap [and at time predatory] loans.  The law was weakened shortly after it passed and set the bar for other States to do the same.

The law states that for any Securities to be issued, two of the three Rating Agencies have to issue a rating for them.  These agencies failed to warn us till the last days of Enron and Worldcom.  S&P, the book states, was so closely linked to Fannie Mae that they supported their high investment rating till only a few months before the 2008 collapse that sent is into this tailspin.

Rating Agencies have no business in Governing this country.  They have a fundamental conflict of interest.  Do you know who regulates them?  It is the Senate.

S&P as well as Moody’s and I’m not sure it would be a stretch to include Fitch (who has been silent for the most part over this) have lost the moral ground to stand in judgment of the credit worthiness of anyone after letting the American Investors, as well as Global Investors down the garden path with Fannie Mae, Freddy Mac, Coutrywide and all the other prime players in the Sub-Prime Mortgage debacle.

It could be said, that with the ongoing investigation by the Senate of the Rating Agencies the would want to appease the regulators.

One could draw the conclusion that if they are headed to Capitol Hill to give testimony to the Senate, that they would want word of their lean towards Harry Reid’s plan: Read Credit rating execs to face congressional heat.

The point of a conflict of interest is not that it has to be actually there; but simply having it out there, where it could exist, raises concern.  The question I have is: what does S&P have to gain by giving an opinion for either Reid or Boehner’s plan.  When I ask myself that question, I find it easier to justify the lean to the one [those who regulate them] and not the other [those calling for tax cuts].

What do you believe?

Respectfully Submitted,
The Lee’s Summit Conservative

One response to Rating Agencies: Conflict of Interest

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