S&P, which has just "downgraded" the United States, was an active participant in the pay-for-play game. When a customer complained about not getting the rating he wanted he was given a better one, but an internal email read: "I don't think this is enough to satisfy them. What's the next step?"
The customer got what he wanted.
Moral issues aside, these guys are lousy at their jobs. The Treasury Department found a $2 trillion error in S&P's calculations. Among people familiar with their work, this revelation surprised... well, nobody. What did S&P do with this information? They deleted the error from their report and wrote a different justification for the downgrade - one that relied on unmeasurable "political" considerations.
Did the customer get what he wanted once again?
S&P is very, very protective of its mathematical models. Every report on their website includes this warning: "No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof may be modified, reverse engineered, reproduced or distributed in any form by any means ..."
Relax, guys. Nobody's reverse-engineering your models -- except as comic-relief for overworked spreadsheet jockeys who have watched you manufacture your prefabricated conclusions for years.
Downgrade this!
S&P's agenda has appeared to be political for a long time, and it looks as if its retrofitting its "analysis" yet again to mirror the austerity economics goals of its paymasters.
Last October S&P said the outlook for the Federal government was 'stable' for the foreseeable future, although a Republican victory in the House was widely expected. This April they said the US government needed to address its deficit problem within two years.
Somebody must have repeated S&P's memorable words of yesteryear -- "I don't think this is enough to satisfy them" -- because then came the next step: Last month they said the government had to find $4 trillion in deficit reductions within 90 days. They had no explanation for their $4 trillion figure, which coincidentally matched the goal being pursued by Democratic and Republican negotiators at the time.
The government has just conclude a deal that provides $2.5 trillion in (very unwise and unfair) reductions. Buckle your seatbelts, numberphobes, because here comes the math: $2.5 trillion (in debt-deal cuts) plus $2 trillion (overstatement of deficit by S&P) = $4.5 trillion. (Hey, modeling is my life.) That's half a billion more than the number S&P wanted. They downgraded anyway.
As you marvel at my proficiency in simple arithmetic -- a skill apparently unreplicated at the rating "agencies" -- please note this warning: "No content in this blog post (ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified or reverse engineered in any form by any means ..."
That means you, S&P!
"A little less conversation, a little more action"
Tim Geithner's right to call these guys out for incompetence, but the Elvis lyric quoted above is as relevant today as it was in 2008. And so is the line that follows, politically speaking: "All this aggravation ain't satisfactioning me." Here are four steps that can be taken to end the agency racket right now:
- Strip Moody's and Standard & Poor's of their NRSRO status on the grounds of egregious professional errors and ethical lapses.
- Announce an SEC policy requiring any future NRSROs to be educational institutions or nonprofit agencies. Provide a proper time frame -- two years sounds right -- to get these agencies up and running, and provide them with logistical and financial support.
- Government law currently protects these "agencies" from being sued by defrauded investors. Lift that protection immediately -- and make sure that executives and officers are personally liable for fraudulent acts. (Nothing clarifies the mind like the risk of a lawsuit.)
- Eliminate "pay to play" immediately by borrowing an idea from the Franken Amendment. Here's how: Automatically assign an agency to conduct a review, rather than allowing the institutions being reviewed to hire one themselves.
This is bound to be a smart political move, since it will give those much-coveted independent voters what Elvis would call "A little more bite and a little less bark, a little less fight and a little more spark."
Oh, and it could save the economy, too. That has to be worth something too, even in this era of reality-free politics.
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