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Fitch Keeps U.S. Credit Rating at ‘AAA’, Cuts Outlook to Negative
Written By Matt Egan
Published November 28, 2011
FOXBusiness

Fitch Ratings kept its pristine AAA rating on the U.S. on Monday, but the credit-ratings company downgraded its outlook to “negative” in the wake of the Supercommittee’s failure to find $1.2 trillion in spending cuts.
The development, which had been hinted at last week, could have been worse for the U.S. as McGraw-Hill’s (MHP: 41.20, +0.66, +1.63%) Standard & Poor’s slashed its credit rating for the first time ever in August.
However, the negative outlook indicates a “slightly greater” than 50% chance that Fitch downgrades the U.S. over the next two years......................>>>>...................>>>>..................Read more: http://www.foxbusiness.com/eco.....ative/#ixzz1f5LEQImc

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Ratings agencies and corruption

While the ratings agencies hold a strong position in financial markets, recent history has uncovered their problematic ways.

The three leading agencies are Standard & Poors (the oldest dating back to 1860), Moodys and Fitch (both of which began life in the early C20). All three were instrumental in the early days of the railroad companies and helped them borrow massive amounts. Of-course, many of the railroad companies went broke. So the problems with the ratings system has been around for a long time.

But they continue to hold a strong position. For a product (company) trying to raise funds, it is crucial to get a triple-A rating then the large institutional investors like superannuation funds and insurance companies can purchase the assets (being prevented by their charters from taking lower rated paper). So there has always been a massive incentive for firms to work in tandem with the ratings agencies.

Further, under the Bank of International Settlements Basel II framework, which imposes capital requirements on commercial banks, highly rated loans score more highly and provide strong advantages for the banks.

The ratings agencies, however make well-documented mistakes, which have been monumental in impact and for which they have largely escaped accountability. Classic failures are the Orange County and Enron disasters where the agencies were clearly incompetent. As we show next, while the earlier “mistakes” suggested faulty rating models or methods, the later sub-prime debacle revealed endemic corruption.

In retreat, the ratings agencies either said that their mistakes were based on corporate fraud – their Enron defence or that investors should use other information in addition to their ratings. But they admitted, for example, to the UK Treasury Select Committee that a great many investors without significant intelligence capacities rely on them to guide their investments.

But it gets worse. During the boom years leading up to the beginning of this crisis the agencies also boomed. The following graph shows the growth in revenue of the three largest agencies over the debt binge period.




You may also want to look at the share prices of McGraw-Hill (owner of Standard & Poors) and Moody’s over this period (just click return on your browser to come back to the blog). As you will see – both agencies boomed and these “analysts” were paid very handsomely for their work.

But the revenue boom of the agencies was funded by the companies that they were rating. Conflict of interest? No, straight out corruption.

In Who’s to Blame for the Economy? Rating Agencies, Dan Freed writes:


Though the ratings agencies held themselves up as independent arbiters of credit quality, it appears they actually just pimped themselves out to the issuers, who paid them for their ratings. As The New York Times reported in December, when Countrywide Financial complained to Moody’s that it didn’t like a rating on a security it issued, Moody’s changed it a day later without any new information coming to light. A Moody’s spokesman denies the agency has ever done this, the Times reported.

But when the executives and “analysts” of the major agencies were subjected to the “blow torch” by the The US Congress Oversight Committee hearings into this matter, some plaintiff admissions emerged. Employees (those “analysts”) of leading agencies admitted taking “money for ratings”. See also this page further information and links to this.

So nothing they say should really be believed at any level. They share the same problems that the auditing profession face. Their fortunes depend on how they rate/audit the companies that are hiring them or using them as “objective” indicators of corporate quality. It is a no-brainer.

The best thing the governments could do would be to regulate the ratings agencies out of existence or legislate that they had to pay (including their analysts) cash for mistakes. Better the former – just get rid of them and force the investment community to invest some real effort into sound financial product appraisal.

Conclusion

The basic point of this blog is to disabuse readers of the neo-liberal view that: (a) public debt issuance will drive up interest rates. They will help the central bank maintain target rates (which could more easily be done by just paying a return on excess reserves). The debt issuance is an entirely voluntary act by our Federal government which does not have to finance its net spending; and (b) the ratings agencies are a blight on our economic landscape.

Digression: Another gem of journalistic boganity

In today’s paper, Fairfax journalist Paul Daley wrote:


… the [Australian] Government … is spending tens of billions of dollars it does not have to prop up the economy … while foreshadowing its willingness to dole out more unthinkable sums on a national broadband network … With unemployment climbing, Australians are concerned about personal circumstance. But they are not so self-absorbed they are immune to worrying about their country’s future finances … Householders understand the simple equation that borrowed money must be repaid. As it is with household shopping, the mortgage and other loans, so it is with the nation’s finances.

It doesn’t get much worse than that. The Australian government has as many Australian dollars as it wants! It is the monopoly issuer. The sovereign government which issues the currency is totally different to a household which uses the currency. The latter faces a budget constraint and has to pay back its debts. The former has no budget constraint can pay back any debt it issues without compromising its spending capacity. A sovereign government has no financial constraint, which is not the same thing as saying they face no spending constraints. But these are voluntarily imposed; or political; or real (there may be no idle resources).

In the earlier article I criticised, the journalist was reporting what others were saying. It was not an opinion piece. That doesn’t reduce the author’s responsibility to balance the discussion which in that case he did not. He used macroeconomic concepts in a totally inapplicable way and reinforced them with commentary from so-called experts who clearly demonstrate vested interests (working in the corporate world).

But Daley’s article is an opinion piece. In that case, why do these journalists, who clearly don’t understand the complexity of the modern monetary system, continue to write this nonsense (as their “opinion”) in the full knowledge their message is being indelibly etched in the minds of their, also untrained readers. In reality, they are just perpetuating the neo-liberal fabrications about the role of government and public goods provision and that is their intent or they are too ignorant to know better. Either way, it is unacceptable. Lucky I didn’t pay for the newpaper!

Etymology of boganity

An international reader has asked me about my bogan register and the low art of boganity, which, aptly, rhymes with profanity.

Boganity is the behaviour exhibited by bogans. Here is the definition from Wikipedia of the noun bogan!

While this is often interpreted in “class” terms – haves and have-nots – I use the term more narrowly to represent wanton ignorance while in in a position of power – which should be taken to mean a journalist with a typewriter and massive daily circulation communicating with a largely uninformed public.