So, following the downgrade and the resulting stock-market plunge, it’s worthwhile to shine a little light on S&P, to eradicate my own ignorance, anyway. If you wish to peer over my shoulder, I’m noting down my observations here. The company is a subsidiary of McGraw-Hill (yes, the guys who made your Geometry textbook), led by one Deven Sharma, a Bihari of relatively modest background (he has a degree in business management from OSU). Mr. Sharma last year penned an editorial in the WSJ complaining that they may be held to account (that is, face liability) for their rating standards, and calling for the repeal of ratings requirements on the debt held by certain investors. That is, the correct response to the colossal failure of ratings agencies to correctly identify CDOs, etc., as radioactive bombs, should be to remove ratings requirements from debt – that is, debt could simply be unrated, and a rating is merely a suggestive imprimatur bearing no significant or determining weight.
It’s quite clear why S&P’s president feels this way; he wants to punt. In the boom time he was happy to rubber-stamp junk and collect his commissions on it; now that the obvious deficiency of his agency (viz., their complete lack of any accountability for their ratings) has come to light, and some people in Congress are proposing an accountability mechanism, suddenly, S&P ratings should only be considered “just one of many tools”.
He also says:
[O]ur criteria for rating a security [following post-recession corrections] as AAA (our highest designation) include consideration of what could happen to a security if the country faces an economic scenario on par with the Great Depression.
Bear in mind that this was written well over a year ago. Now, it’s arguable that S&P was spot-on for rating all of that crappy debt AAA, since as it turned out, it was backed by the U.S. government. The government took the hit on behalf of all of that shitty debt, and now that its debt situation looks precarious, S&P wants to downgrade THEIR rating. This is high irony – if they had just done their fucking job correctly in the first place, instead of being greedy banksters, there would have been no need for a downgrade of U.S. government debt. S&P screws the pooch twice – first by not doing the job a ratings agency should (actually rating debt correctly), and then pillories the government (and the entire world) for cleaning up after their mess. Die in a fire, S&P.
None of which is to say, of course, that we don’t deserve a downgrade. We’re like a Bantustan right now, except without the political cohesion.