U.S. loses AAA credit rating from S&P
news.yahoo.com/p-reconsidering-u-downgrade-cn...Posted Aug 6, 2011, 12:38 AM UTC
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so you think most people are sane? Markets reflect expectations, and now people have something to cite when they panic
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but you know what's really insane, the fact that they HAD to rate it AA+ now... just try and imagine the 'behind the scenes' actions that lead up to this.
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Ratings agencies and regulatory bodies are notorious for being peopled with former execs from the industries they're SUPPOSED to be policing. The 'individuals' in big business, the gov't, media... they're all interchangeable in plutocracies, especially where money is concerned.
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Nobody will ever need S&P to rate US treasury bonds for them. People only need rating agencies to rate bonds they don't know much about. And even for that these agencies are nearly worthless because they have proven themselves to be highly unreliable in the recent past.
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I feel like this is going to hurt the ratings agencies more than the government.
For the trillions of dollars in funds that are required to hold AAA securities there is no alternative to Treasury bonds; between the massive losses they would face having to dump them all and jump into other crowded assets or seeking an exception to the requirement, these funds are going to seek the exception. This ends the charade that these ratings are actually useful (instead of just responding to the market or generally being full of shit with their obvious conflict of interest) and the firms begin to collapse.
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For the trillions of dollars in funds that are required to hold AAA securities there is no alternative to Treasury bonds
In most cases pension funds won't have to dump their treasury bonds unless 2 out of the 3 credit rating agencies downgrade the debt.
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Please explain why there are no alternatives to T-Bills, I've heard a few people say this elsewhere.
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It has to do with the size, liquidity, and security of the market. The US bond market by far the largest, being ~14 trillion dollars. It is the most liquid, you could drop billions of dollars into the market and price will barely twitch. It is also one of the most secure, political brinksmanship aside; it would take something massively traumatic, like nuclear war, to make the US actually incapable of paying back bond holders.
The few close alternatives are the eurozone, which has it's own issues, and Japan whose relative debt is double ours and faced a downgrade years ago. Despite all our problems, the US is still the best bet.
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it would take something massively traumatic, like nuclear war, to make the US actually incapable of paying back bond holders.
Or a president threatening default.
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Well, Congress, but yeah.
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That's basically just the case. The US is the de facto standard "safe debt" bet. That's just it. Historically speaking.
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...as long as "history" only considers post 1971.
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If I understand your question :
A lot of institutions are required to keep a ratio of their investments in AAA rated bonds. Banks, pension funds, mutual funds etc. US government bonds are a large portion of the available AAA market. Potentially a lot of money need to be moved. This will increase the demand and price of remaining AAA investment grade bonds and reduce the price and increase the yield of the US bonds.
What I am not sure about is what will happen in this situation where only one of three rating agencies have relegated the US bonds.
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You get to choose your rating agency (for offerings, ie cdo's), though oftentimes they are specified in the funds' charter.
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So the issuer of the bonds choose which rating agency to use? Then we can presume that the US will use the rating from the other raters in the future ...
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For the trillions of dollars in funds that are required to hold AAA securities there is no alternative to Treasury bonds
There is plenty of AAA rated paper out there.
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So basically you are saying that the US is too big to lose AAA?
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No, S&P proved that wrong just a few hours ago.
I'm saying S&P is playing chicken with a freight train. They laid their credibility against the US government and they're going to go splat.
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They did that for me after their AAA MBS
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now, act 2: in which both sides call one another terrorists.
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And so Krugman's question: why does anyone listen to them?
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The downgrade doesn't have anything to do with passing (or delaying) debt ceiling increases. This rating hit is a direct consequence of rising debt levels and a complete unwillingness in Washington to make meaningful and genuine reductions to us debt (instead of just reducing the rates of increase). From the article:
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.
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Thanks for linking to the report. I should have known better than to just trust an article's summary. Reading the report it sounds like the downgrade is more about governmental paralysis when it comes to making cuts. If substantial cuts were agreed to.
Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures.
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WASHINGTON--A top official at rating firm Standard & Poor's said Friday the company's decision to downgrade U.S. government debt for the first time in 70 years was due in part to Washington's political paralysis surrounding raising the debt ceiling.
http://online.wsj.com/article/SB10001424053111903454504576491043656840536.html
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My conspiracy theory is that certain traders have actively pursued getting this scenario though (stall the debt ceiling increase to create fear, collaborate with rating agency, short the market all in)
It is highly likely that many people wanted this downgrade of treasury debt. Remember, a lot of people stand to MAKE A LOT OF MONEY when interest rates on US treasury debt goes up. Taxpayers are losers but bond holders are big winners.
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And they're both right. Best waterboard the lot and send them to jail.
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I don't see how you can blame Democrats for this. The only thing I thing one could legitimately claim is that they were far too soft and gave up most of their ground. To call that equal to the other side just seems ridiculous.
To put it in different words, that's like saying the good guys are as bad as the bad guys because they didn't hold to their principle enough, even though the other side was holding a hostage (the economy)
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Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging
Probably because we have 100 trillion of unfunded liabilities and the Democrats won't cut spending
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What about the President's proposed plan that cut spending and raised taxes or the time before that when Republicans steadfastly refused to let tax cuts expire not just on those making over $200,000 a year, but on those making $1,000,000 every year?
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This move was very simply a message to washington to stop fucking around. The fact is the two parties couldn't agree on the last 5% and as a result almost pushed the country into disaster.
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I thought this wasn't supposed to happen?
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Yeah, if I weren't american I'd be right next to you with a giant coke.
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The markets will dive a bit this week, then everyone will realize that what S&P believe doesn't matter. Regardless, it's time to raise taxes, if for no other reason to demonstrate that we've not completely lost our minds.
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to demonstrate that we've not completely lost our minds.
Sir, I believe that train left the station a decade ago..
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Right on schedule.
Is it cynical or just realistic of me to wonder how many congresspeople are heavily invested in hedge funds that were betting on this happening, and are therefore profiting off of causing this?
They've got this wonderful "good party/bad party" thing going to make sure that nearly everyone's political tribalism will ensure that the fault is firmly laid on "the OTHER party for insanely opposing MY parties' perfectly sensible policies".
People are lazy, and thinking is work.
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All I care about is that France and Canada now have a better credit rating than I do. I won't even have a good response if one of them makes fun of me about it!
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It's tough being the younger brother of a deadbeat spendthrift.
Here in less religious and better educated Canada, our population is low enough that we still live in a land of unimaginable bounty. Makes the whole "economy" thing easier.
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It does seem like our (USA) bureaucracy has not scaled well with time.
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The economic collapse of the US. I believe it was one of the goals of Bin Laden.
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brought to you by the GOP.
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Hmmm. Maybe these people can make Washington listen.
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Yes, because New York knows the value of a modest lifestyle, and is the very model of reasonable compromise.
Why yes, I am from Boston, why do you ask?
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Every day I feel more and more like I'm seeing behind the curtain.
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Why did they wait until Friday night--the quietest news hours of the week--to make this announcement?
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To have as little impact on the markets as possible.
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I'm fairly sure the big boys knew on Thursday night, Friday's fall was massive.
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Kind of the same reason why you wait till friday to fire people...
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MUST BAIL THEM OUT!!
/statism
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Looks like we compromised for one of the outcomes we were trying to avoid?
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Had we defaulted, we would have been in instant D-grade. Defaulting would have been much worse.
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I'm fairly certain that history will look back on the U.S. post-9/11 and say the terrorists won.
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S&P rated all those worthless mortgage backed securities AAA, and now rates the U.S. government is AA+. That's a ratings company I can trust!
Well, unless you are a major bond investor I don't think your opinion matters.
How did you rate those securities? How did EVERYONE else? Take a look at the 99.9% ratings -- the tens if not hundreds of thousands of them that they do that have done just fine.
I rated them weak. I did not buy any, because it was clear to me that when you make loans to that many new people, there will be a lot of defaults. The major investors knew this too, but they relied successfully on the fact that they could sell the mortgage backed securities for a profit regardless of the underlying weakness.
... Past performance is absolutely not predictive in cases where inter-correlative behavior has unstable feedback components.
If the failure of 1 security can either have an impact on others, or if an underlying cause can cause behavior beyond your operational tolerances, that system is, by definition, not predictable.
They Post hoc ergo proctor hoc'd that bitch, and should suffer any failures therein. Basically someone needs to send them back to basic statistics.
It's never too late to do the right thing.
Under that logic, You shouldn't be trusting the AAA ratings for the US by the other rating agencies that also got mortgage backed securities wrong. Does one mistake undermine everyone's credibility?
I don't think they had all that much credibility to start with...
One mistake that bad undermines everyone's credibility. They were afraid to "buck the system" since people (including the ratings companies) were making so much money on MBS.
Not only that, but they are pretty much acting as an arm of the Republican party. They have zero credibility.
If the derivatives were AAA then the US should be FFF