As we predicted on August 8, 2011 in our posting (entitled "S&P Warned Us, Now We Get To Pay The Piper), Standard and Poor's now is the subject of a SEC investigation on top of inquires from local governments, Treasury and the US Senate. How transparent can this Administration be? It was clear to everyone who pays attention to financial issues that there would be a downgrade of US credit if the government did not meet the budgetary requirements set by S&P in July. For them not to acted as promised would have made them "the little boy who cried wolf!"
In our opinion, S&P did the right thing based upon their appraisal of the financial stability of the US government. Would we rather not seen the downgrade, most assuredly, however, it is time for someone to tell the King that he has no clothes. This country has issues and its governmental officials on all levels are not attending to business. We need to addressing the deficit and the debt before others (i.e.China) tell us what we must do.
The lesson learned by many from the governmental actions against S&P and others is that if you are in the financial business you do not want to say anything negative. Everything is rosy, profits are up, the future looks great will all you will be able to put in print. This will have a chilling effect on advice and unbiased appraisals of companies and governments which must contain both negative and positive elements. If not, the advice is worthless.
Trampling on S&P might make great press for your base however, in the end will do extensive damage to investors who need an unbiased review of the financial stability of the instruments they are selling. If these firms can only print "good news", their entire reason for existing, evaporates.
Instead of the downgrade being negative, it should be viewed as positive. It pointed out a problem that in S&Ps opinion demanded a decline in the rating. Even if the rating is proven erroneous sometime in the future, it was their conclusion at that point in time. We must have independent agencies that will honestly evaluate debt and tell the investing public the truth. To have government insist that a debt instrument is better than the rating company believes it to be would be the end of the ratings system.
The following article posted on Yahoo finance today goes further into detail.
Wall Street Dragged into S&P Downgrade Witch Hunt
By Jeff Macke | Breakout –September 21, 2011
The issue may have been moved off the front page of the newspapers, but the government's reprisals against those even tangentially connected to Standard & Poor's downgrade of US debt continues. The latest development reported yesterday, is the SEC allegedly issuing subpoenas to hedge funds and other firm that placed "unusually large bets that markets would decline" ahead of the ratings agency's August 5th downgrade.
S&P itself is already under assault from local governments, the US Senate, the Treasury Department, and perhaps most daunting, the new Czar of Financial Morality, Warren Buffett. Curiously none of this official outrage is being directed at the entire ratings industry for its nakedly conflicted business model or its role in the housing crisis. The government (and Mr. Buffett) are targeting Standard & Poor's exclusively because the agency had the audacity to point out the obvious fact that betting on America is no longer the "sure thing" it once was.
It's worth noting that the ratings industry got a pass on the 2008 financial crisis because the government upheld their First Amendment rights to an opinion. Now S&P exercising that same right in regards to American debt is unleashing hell upon the agency and market bears in general. It would seem the First Amendment applies optimistic self-serving idiocy, not negative views, flawed though they may be.
Did hedge funds hear rumors of a downgrade? Almost certainly. So did I (and I said so on Eric Bolling's "Follow the Money" program that day). Stifel Nicolaus wrote of "chatter" regarding the downgrade the morning of August 5th. Pretty much everyone knew, even if no one could confirm it. A downgrade of the US was in the air and had been since the move was threatened three-weeks prior to August 5th. Traders didn't need Standard & Poor's to tell them that stocks were in trouble, it was quite obvious to anyone with a brokerage account or access to a newspaper.
The SEC investigation is intimidation of the lowest form. It says the market isn't free to those who are bearish. The investigation says negative trades will be punished, should they prove prescient. But only selectively. The SEC is all over these trades but has never provided a satisfactory answer regarding the heavy put activity in airline stocks prior to September 11th, 2001 but it's cracking down immediately on a couple funds who correctly bet that stocks were headed lower. It's appalling.
If you're of the belief that SEC subpoenas are unrelated to the abuse being heaped upon Standard &Poor's for the downgrade, then you live in a mental Toon Town or I'm way too cynical. The SEC is a different, obstensibly independent group. It also seems politically expedient for any and all public officials to go after both Standard & Poor's and "the rich." There are no coincidences in Washington, D.C. particularly with this kind of coordinated attack.
The way our public officials are squashing S&P's right to do their job and market participants' right to both buy and sell stocks is troubling. This isn't an issue of whether or not you like or approve of rating agencies or hedge funds. This is an issue of the government selectively harassing and prosecuting that which they find too negative. It's present day America's version of sending dissidents to Siberia and it's disgusting.
I partly agree and partly disagree. I agree that the S&P should be free to publish whatever opinions they wish on any securities without threat of litigation by the government when they lower their rating on U.S. debt. I don't think anybody would dispute that point.
ReplyDeleteHowever, this guy is missing the real scandal. It was the Wall Street banks who did arbitrage on the rating agencies to get AAA ratings on their junky CDO's. S&L and others pandered to these corrupt bankers in order to collect their stinking rating fees. By all means, they should be sued by the government. But the litigation should be over their role in facilitating the 2008 financial collapse, not for downgrading U.S. debt.
Given their track record, I don't know why anybody should even trust or care about their opinions on any investment. I certainly don't.
--David
P.S. I watched Obama's entire speech at the U.N. today regarding Israel and Palestine. I will be interested to see what account of the speech you post from your sources. I don't think he has much standing to talk about peace, considering that he has kept these wars in Iraq and Afghanistan going ever since he took office....but I digress.
They definitely blew it when it came to the junk that was sold as AAA until 2008. I agree wholeheartedly and they should be held accountable for their misleading ratings.
ReplyDeleteThe issue that needs to be addressed is the funding model they use for their ratings. The companies pay for the ratings which is very convoluted in the first place, however, it works because all the rating agencies get paid the same way. If only one was paid that way, it definitely would put pressure on the agency that billed the company for the rating. However, I would not disagree with a different funding model. Say all bond issuers pay into a "rating fund" and the agencies are paid out of the fund based on a formula.
This current threat by the Administration is an abuse of power. S&P should not be punished for telling the truth. They are in the right spot and the other rating agencies are pandering to the government so they will not be sued. If this stands, it will only be the first step to what you say, "I don't know why anyone should even trust or care about their opinions on any investment."
I will scour my sources and give you something to chew on regarding Israel and the Palestinians.