Saturday, August 6, 2011

Ignore the weasels fed by Wall Street

A friend asks if Krugman has written about the S&P downgrade yet.  Krugman has written a few blog entries on or related to the subject; I'll just like some of the more recent ones.  I'm not sure if he's mentioned the S&P downgrade or the threats to do so (which started a few weeks ago) in any OpEds.

The basic story is that S&P are just some guys paid by Wall Street investment banks to rate their stuff.  So if an investment bank is selling a security, the investment bank pays S&P to give the security a rating, and in spite of the obvious conflict of interest, we're supposed to believe S&P, because they are putting their name on the line.  Well, we saw how well that worked out in the mortgage meltdown, S&P and all the others had given top ratings, sometimes even AAA, to mortgage backed securities which turned into toxic waste and the bonds of firms like Lehman Bros which went poof.

So who should believe these guys anymore?  Answer: Nobody.

Now, who pays S&P to rate US bonds?  Well, certainly not the US government itself, which is not an investment bank.  Largely it's S&P just doing it for their friends in Wall Street, saying what those friends want to be said.  Thus, such ratings are just bogus, and motivated by the desire of S&P to please its friends, and those friends to influence US policy.  Some would call this Political but I'd rather not besmirch the word Political.

Now there's an extra twist that in the last few months the US Securities and Exchange Commission (SEC) has been going after the ratings agencies, including and perhaps especially S&P, for the obviously invalid ratings they were giving to mortgage backed securities before the mortgage meltdown.  The defense of S&P is that it's ratings are simply a matter of "speech".  S&P says they should be free to say whatever they want for whatever reason.  As this was going on, barely reported, S&P started issuing threats about US bonds.  I'm not sure if the correct term for this is extortion, but it's something like that.

Anyway, I think I've read about most of this on other blogs, such as Naked Capitalism and Angry Bear (shown in the sidebar on the right of my blogsite) which are not afraid of angering advertisers.  Krugman, who publishes through the NY Times, hasn't spent as much time on S&P, he's more interested in real stuff like unemployment, but he has written a few posts about it (and be sure to click on his further links for more background).

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