S&P's tit for tat

August 6, 2011 in Economics,Finance

Thanks to the time difference, I went to bed last night thinking the markets had stabilized, but woke up to learn that the United States -- the unassailable risk-free issuer -- had been downgraded by S&P.

This is embarrassing -- on S&P's part.

As we all recall, S&P was blamed squarely for contributing to the financial crisis of 2008. Just a few months ago, a Federal commission concluded that "the three credit rating agencies were key enablers of the financial meltdown....This crisis could not have happened without the rating agencies."

And my, how the tables have turned. S&P had its hand on the throat of the government -- and squeezed. The largely semantic downgrade from AAA to AA- is, in truth, no more than a shot across the bow, a reminder of the agency's power. It's a childish demonstration, a minor revenge against a chastising government. But somehow in its excitement, the agency failed to consider the impact of the downgrade. Sure, there are ways around all the contractual issues but the fact remains: the U.S. government does not have a AAA rating. What, then, does it take to have a AAA? If the ability to literally print money doesn't do it, what does?

You would be mistaken if you thought the debt ceiling mess was the reason for the downgrade. No, it was merely a fortuitous event that aligned public opinion with S&P's desired action. It was a catalyst, not a cause. For the true motivation we have to look no farther than the same self-serving attitude that consumed the rating agencies in 2008.

This entire debacle is so idiotic that I struggle to write sensibly about it. There are few more blatant demonstrations of immaturity than S&P has shown with this little power gamble. In their haste to show Washington who's boss, they actually made a mistake of $2 trillion!

But then again, what investors are actually taking them seriously?

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