Posts Tagged ‘S&P’

WTF, S&P???

26 September 2011

How did I miss this one? Bloomberg News, on Aug. 31, reported that Standard & Poor’s is still giving its highest rating, AAA, to subprime-mortgage-backed securities:

Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government….

More than 14,000 securitized bonds in the U.S. are rated AAA by S&P, backed by everything from houses and malls to auto- dealer loans and farm-equipment leases, according to data compiled by Bloomberg.

(Hat tip: Simon Johnson.)

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Did S&P’s downgrade actually help the Treasury bond market?

8 August 2011

Yes, I think it did. As of 2:53 pm, the yield on ten-year Treasuries has plunged 20 basis points to an ultra-low 2.36%, their lowest level of the year. It’s the stock markets that are a bloodbath today, with the S&P 500 and Nasdaq down about 6%. Prices for the safe havens of gold and Treasury bonds are both way up. Inasmuch as the S&P downgrade has upped the fear factor, it’s hurt stocks and helped T-bonds.

To qualify this: The S&P’s role here has likely been vastly overstated by the media. (Krugman has already lost his lunch over this one, so I don’t have to.) For starters, when U.S. markets opened this morning, the T-bond market didn’t show much of a reaction either way (down just 2 basis points in the late morning, i.e., basically unchanged) and the stock markets’ initial tumble was not out of line with what they’d been doing the past two weeks (the S&P 500 fell almost 11%), going into the weekend. The snowballing of money out of the stock market and into the T-bond market is something that happened later in the day, not a plausible initial reaction to the downgrade. But plausibly the downgrade added to the general climate of fear, which got a lot more heated by the afternoon, so  . . . it still seems that agent 6373 has accomplished her mission.

Many commentators have said that the unfolding crises in Italy, Spain, and the European Central Bank are both more dire and more unpredictable than the revelation that Washington is so dysfunctional that even a disgraced ratings agency thinks so. The weekend’s bigger announcement may have been that of ECB President Jean-Claude Trichet that the ECB would try to alleviate Italy’s and Spain’s debt crises by buying up huge chunks of their debt. Otherwise known as monetizing the debt, the modern-day equivalent of printing money to pay the bills.* The announcement seems to have helped Italy’s and Spain’s sovereign debt markets a bit, as interest rates on those bonds fell slightly, but it casts doubts on the ECB’s credibility as a tough-minded central bank that doesn’t go around picking up the tab for member countries’ large debts.

* You might ask: Doesn’t the Federal Reserve do the same thing when it buys U.S. Treasury bills, notes, and bonds as part of its open market operations and “quantitative easing”? Not quite, though it does count as monetizing the debt. The big difference is that the Fed, with a few distant exceptions like during the world wars, does not try to buy up U.S. government debt just to help out the government. (Will they still be so above the fray if and when hardly anybody wants to buy U.S. Treasuries? I’ll leave that one for my libertarian commenters.)

Ratingzzz

6 August 2011

For years I taught money and banking under the impression that U.S. Treasury bonds carried no rating at all. I thought they didn’t need to be rated and that the rating agencies agreed. I thought the fact that bondholders accepted lower interest rates on Treasuries than on any other bonds, even AAA-rated bonds of other entities, meant they regarded T-bonds as the least risky (and most liquid) bonds out there. A related issue is whether there’s any point in rating the debt of national governments whose finances are an open book, unlike those of corporations who open their books for the rating agencies but don’t have to for the public.

Standard & Poor’s downgrading last night of Treasuries from AAA to AA+ reminded me of all that. Do bondholders really need S&P, Moody’s, and Fitch to tell them whether T-bonds are safe? Anybody who follows the U.S. fiscal news  — e.g., anyone in the bond market — would have their own judgment on the matter. Call me cynical, but I find the timing of the announcement suspicious. First, it comes rather late, as it was clear five days ago that the Budget Control Act of 2011 was going to pass and what the substance of it would be. Second, it comes at the start of the weekend, two days before the markets reopen; that’s plenty of time for other news to come along and offset whatever effect S&P’s announcement has on the markets. My cynical hunch is that S&P is afraid the announcement will have no effect on the T-bond market, thereby underscoring their own credibility rating, which has been F ever since it came to light in 2008 that they’d been rubber stamping toxic bundles of subprime mortgages as AAA. I think their announcement is their way of gambling that if the T-bond market ever does go south, they can say they called it first. (Kind of like those ridiculous predictions every week on “The McLaughlin Group.”)

As usual, Krugman nails it. He acknowledges that the intransigence of Congressional Republicans makes any kind of meaningful long-term debt deal unlikely, but says:

‘On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

‘Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.’

In passing the Budget Control Act, Washington lawmakers put deficit reduction ahead of job creation, against the wishes of the public, Keynesian economists, and even (apparently) the stock market. Yet it wasn’t enough for S&P, who say the way out of this hole is to dig even deeper. No, S&P, slashing spending and raising taxes in a depression doesn’t improve our financial health. Krugman again:

‘More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.

‘So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.

‘In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.’

Ironically, the U.S. attained its AAA rating in 1941, just as we were heading into World War II and the (publicly held) national debt was about to explode, to about 140% of GDP, roughly double what it is now. S&P evidently took the long view then.