Reasons to be angry with S&P (part 2)

One of the last things I did –  before I went off to build sandcastles and look slightly longingly at the amusement arcades I’m no longer allowed 8p pocket money for to see if I can make some pennies out of the bottom of the slot through a clever mix of strategic placement and timing of coin release – was to do a rush edit/slash job of this piece on Standard & Poor’s and the need to pick to launch both direct and indirect political attacks on them. 

Having received a further brutal slashing from Sunny, it appeared at Liberal Conspiracy.  Some of the initial aim – to make it a reasoned call for effective multi-layered action – was lost through the editing process, and it looked more like a straight whinge about the injustice of it all, but heh, beggars for readers can’t be choosers, and I’m grateful Sunny lets any of my ramblings onto his august site.

The comments, which appeared after I’d place four-knotted hankie on head, were in general as to be expected, with a good deal of  ‘inside knowledge’ being brought forth in defence of the credit ratings system.  

They’re worth reading through, not least as they tend to come back to Standard & Poor’s presumed business needs-led neutrality and ‘expertise’.  As one example, a knowledgeable commenter notes:

‘Also, a credit rating agency would I imagine think twice about knowingly issuing false ratings, because if they get a reputation for doing that, that would be an act of commercial suicide (would you pay somebody for credit ratings, if you thought they were bullshit?). I’m not saying it (fraud) didn’t happen, but it’s quite possible that the credit rating agencies were simply as mistaken as everybody else.’

While that explanation sounds plausible enough at first hearing, evidence that was coming to light at about the time I was drafting the original post casts more than a little doubt both on the ‘expertise’ of Standard & Poor’s, and on the theory that it is in their best interests simply to give the credit rating they think reflects the credit worthiness of investments.  In so doing, it sheds light on the essential hypocrisy of the financial ’market’ we suffer from at the moment.

It goes like this, according to US blog The Exile (with my hyperlink clarification):

‘On July 14th Standard + Poors downgraded a whole class of 2007 vintage CMBS  (Commercial Mortgage-Backed Securities) from AAA (the highest rating, what institutions like Harvard and the Treasury get) to BBB-, the lowest grade for something considered ‘investment grade’ i.e. not speculative. Bond nerds nationwide thought for a second that Standard + Poors might actually be doing their job for the first time in years. However, one week later they changed their minds and re-rated the bonds back at AAA again, prompting everyone where I work to refer to S&P as Laurel & Hardy.’

Sarah Mulholland at Bloomberg also covered the change of heart.

So what’s going on, and why this dramatic switch from top to bottom rating and back again, with none of the possible rating points used in between?

The ‘official’ story from S&P is that the reversal is all to do with its internal ‘refining of assumptions’ for the rating of CMBS conduits, covered in a 21 July report from S&P (of which the relevant excerpts are here), and that the downgrading was reversed when it was ’realised that bonds with a shorter lifespan were less risky than other bonds in similar structures with longer lifespans’ (according to the FT report on this).

The other view, and one which I tend to concur, is that the official view is utter bollox, and that the real reason is because (again according to Sarah Mulholland (my hyperlink):

‘Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF (Term Asset-Backed Loan Facility). Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.’

Yes, you read it right.  The real reason S&P fully upgraded, at a shot, the CMBS conduits was that it realised, belatedly that, if it didn’t, then the CMBS conduits would not benefit from government largesse.

This, I contend, should put paid to any myth that S&P are anything other than a corrupt part of a corrupt system, and reinforces my view that they are a legitimate and strategically useful target for anti-capitalist political action, direct and indirect.

Interestingly, it appears the US administration may share that view, though in perhaps less extreme terms.  According to the FT:

‘Credit rating agencies would face a raft of new disclosure rules and restrictions but would not be forced to overhaul their business models under proposed US legislation sent to Congress on Tuesday.

The plan by the US Treasury is aimed at reducing conflicts of interest at rating agencies, boosting the regulatory authority of the US Securities and Exchange Commission over the agencies and reducing the financial system’s reliance on credit ratings.’

So the US Treasury ‘gets’ the ‘conflict of interest’ thing (as in rampant corruption which allows the bankers who screwed up to get government cash because they did), even if it is not up to confronting the issue properly.   

Surely, then, Labour party and the Left in Britain can ‘get’ it, and take the appropriate political action.

Everyone up for that demo at Canary Wharf then?

(Hat tip for lead to sources: Chris Williams in his comment on a Yorkshire Ranter post linked to my original S&P attack post.)