Monday, April 18, 2011

The full arrogance of the ratings agencies on display

Just watched some guy from S&P being interviewed on CNBC. Steve Liesman asked him if he thought that the probability of a default by the U.S. had just increased. The guy said, "yes." Then Liesman asked him to explain how the U.S. can default when it issues its own currency and when its debts are denominated in its own currency. The guy basically couldn't answer. He pretty much said it didn't matter and spoke about a "rich history" detailing the problems of countries with high debt, failing to make any distinction between what nations in that rich history were under gold standards or fixed exchange regimes (all). Then he just said "we do not accept the idea that a country with its own currency, treasury and central bank is immune to debt problems."

Now that's arrogance for you. Since S&P simply cannot accept the idea, they will rate on the basis of their misguided belief and bias. Ordinarily that would simply be a reason to laugh at them and see them for what they are: a bunch of arrogant and elite functionaires. Sadly, though, policy makers, investors and others listen to these idiots and their ratings and pronouncements, which means this will have a real impact on people.

I worked at S&P back in 2000 and was basically fired after getting into an argument with chief auto analyst Scott Sprinzen after I wrote a highly negative article about General Motors, whose stock was trading at 80 per share at the time. I questioned GMs outlook and the rosy assumptions that they were making for their finance unit. Sprinzen took exception to this saying that GM was strong and would not have any problems. Well, I was forced to resign.

Fast forward: GM went bankrupt and had to be saved by taxpayers. Sprinzen is still there at S&P. I am not.

These agencies have been conducting business for years despite the fact that they operate with huge conflicts of interest. They are paid by the entities they rate so there is massive incentive to make things look rosy when they are not. They are protected by the government and have no competition. This has made them arrogant to an extreme, as exhibited by the jerk being interviewed on CNBC. Sadly, nothing will be done to reign them in or make them more accountable for their ratings.


Ralph Musgrave said...

According to Janet Tavakoli in her book “Dear Mr Buffet”, Warren Buffet pays no attention to rating agencies.

mike norman said...

He's smart.

Tom Hickey said...

Sounds to me that the rating agencies are sending a signal to the US government they they need to be treated like the private sector treats them, "You be nice to us, and we;ll be nice to you." I wonder what the $ figure is for the US to keep its AAA rating. I suggest Tim call Lloyd over at GS and ask what the going rate is now. Maybe Lloyd can even get him a better deal with his influence at the agencies, if Tim does something nice for GS.

Chewitup said...

is it cynical to suggest that Lloyd and Tim have already spoken?

mike norman said...

The way to bring pressue on S&P is to go after Terry McGraw, Chairman of McGraw Hill. They own S&P.

googleheim said...

how about argentina as an example ...

you would think that they had their own peso, and borrowed heavily

however they were on a pseudo "gold" standard by erroneously linking their peso
1 peso = $ 1 USD

then clinton balanced the budget and interest rates went up NOT DOWN ! and then their debt blew up and they defaulted.


1. don't balance the budget

2. don't fix your currency to gold or to another currency

SchittReport said...

i'm a little confused - mike, are you the one who worked for S&P back in 2000/1?