US credit rating: the story behind the headlines?


Standard  Poor’s (SP) is concerned that Democrats and Republicans will not be able to agree a plan to reduce the growing US deficit.

The agency has downgraded its outlook from stable to negative, increasing the likelihood that the rating could be cut within the next two years.

The US Treasury responded that SP had underestimated its ability to tackle the national debt.

via BBC News – US credit rating warning prompts global markets fall

Well that was the story at the start of the week but why now? Dare I suggest that the answer lies in a bit of “tit-for-tat” worthy of the school playground BUT demonstrating the indifference of Political and Financial institutions to the mayhem they have presided-over?

IF my memory serves me correctly I’m sure there was a pretty obvious “threat” of downgrading the US Government credit rating – made by the rating agencies during the congressional hearings (in late 2008) – in an attempt to blackmail them into not prosecuting.

This extract is from an article that appeared on 15th April with, the above appearing on 18th April. Now, is it me or is this a strange coincidence of timing? People were taken by surprise and yet the shock and impact seems relatively minor. One could conclude that this is because this latest threat is without any real substance or, it may well be, because the credit rating agencies put so much effort into emphasising that their ratings were, after all, only “opinions”…and discredited one’s at that!!?

Frank Parisi, managing director of the global structured finance unit at Standard & Poor’s, wrote in an email as early as 2005 that the ratings agency chose to “massage” sub-prime mortgage numbers in order to “preserve market share”.

Parisi was responding to an email stating that the agency’s ratings model needed to be adjusted to account for the higher risks associated with subprime loans, which are widely seen as a large factor in the crisis as struggling homeowners failed to pay their debts.

A month later, Parisi wrote another email, reiterating that he rejected the thinking behind Standard and Poor’s actions. “Screwing with criteria to ‘get the deal’ is putting the entire S&P franchise at risk – it’s a bad idea.”

The emails emerged in a report by the US Senate Committee on Homeland Security and Governmental Affairs, which also made public “aggressive” emails by banks urging traders to grow profit through causing “maximum pain” in the market.

The report concludes that the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed safe.

“The result was a collapse in the value of mortgage related securities that devastated investors”, the Committee wrote in its report. “Internal emails show that credit rating agency personnel knew their ratings would not ‘hold’ and delayed imposing tougher ratings criteria,” in order to “massage” figures, it said.

The good news for Ontonix is that the case for affordable, objective and (100%) quantitative rating of financial structural robustness gets stronger!

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