Rocky Vega

Now, as anticipated, a debt ceiling agreement has been reached and the wait is on to see whether the major rating agencies — Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings — will reaffirm or downgrade the US’ triple-A status.

A credit rating downgrade any time in the near future seems unlikely. Instead, Liz Peek at The Fiscal Times suggests the ratings agencies have simply been exploiting the debt ceiling drama in an opportunistic media push to regain some credibility after their many blunders, just a few of which are highlighted below.

From The Fiscal Times:

“Their role in aiding and abetting the purveyors of the now-infamous CDSs and CDOs, by providing unwarranted triple-A ratings, was not the first in which Moody’s and S&P had been caught wrong-footed. Both companies had failed to unearth the chicanery at Enron and WorldCom, for example, though a small rival named Egan-Jones had blown the whistle on those companies before they went under…

“…Criticism of the ratings agencies is not confined to our shores. In the past several weeks, monetary authorities in Europe accused the firms of “bias” after Moody’s downgraded Portugal’s debt to junk status. European Commissioner President Barroso suggested that the EU should begin looking for alternative sources of guidance for their debt, and was quoted as saying “We must break the oligopoly of the ratings agencies.” Other observers noted that, as usual, the agencies were actually behind the curve on spotting the deterioration in EU debt; the credit default swaps markets had forecast the slide months earlier.

“For all these reasons, there is ample incentive for Moody’s and S&P to try to get ahead of the U.S. looming debt crisis. Despite their history, their input has been welcomed — treated as oracular, even — by our political leaders. For both sides in the debate, alarm bells rung by the agencies have served a purpose. It has allowed President Obama to chastise the GOP for not responding to the gravity of the debt crisis; at the same time it has allowed Republicans to press their case for spending cuts. Unhappily, unless the two sides in this debate emerge from their bunkers and manage to fashion a meaningful compromise, the ratings agencies may well have to follow through and downgrade the nation’s debt, conceivably costing taxpayers hundreds of billions of dollars in higher interest on the federal debt in years to come.”

The ratings bias Peek discusses is readily apparent… toward the companies that pay for ratings, a clear conflict of interest, and, of course, toward the US. (Also, arguably against Chinese debt.) The US bias likely stems from the fact that this nation’s very own Securities and Exchange Commission decides which rating agencies qualify for status as a Nationally Recognized Statistical Rating Organization (NRSRO), an essential designation for making a credit rating agency relevant to investors.

Of course, whether the manipulation even matters is another question entirely. As Quantum Fund co-founder Jim Rogers recently suggested, the US has already lost its AAA status among sophisticated investors. Ratings agencies have been drumming up attention so as to not be late, again, to the downgrade party… but this party’s already long over. You can read more of Peek’s opinion in her Fiscal Times piece on how rating agencies are exploiting the debt drama to regain trust.

Best,

Rocky Vega,
The Daily Reckoning

Rocky Vega

Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.

Recent Articles

Addison Wiggin
One World, One Bank, One Currency

Addison Wiggin

After the 2008 financial crisis, little could be heard over the deafening cries of "mission accomplished." And while the Fed's massive QE program seemed to work, the question remains: for how long? Addison Wiggin explains why the next round of QE will fail miserably, paving the way for the IMF to step in with something called "special drawing rights." Read on...


Who’s Really Profiting from Drone Tech and How to Join Them

Wayne Mulligan

Despite what you hear in the mainstream news, the commercial market for small drones could eventually dwarf the military one. In fact, it’s already happening. This is a big market, and it's getting bigger by the day. Today, Wayne Mulligan explains how to get in on the ground floor. Read on...


2 Simple Charts that Will Help Improve Your Portfolio

Greg Guenthner

While a traditional "buy and hold" investment strategy can be a good way to make money in the long run, it's by no means the only way. For those investors who dismiss technical trading as a "witchcraft" and impossible to figure out, Greg Guenthner has just two charts to show you that could completely alter how you feel about trading stock market trends. Read on...


Why America Needs More Tax Inversion

Clem Chambers

American citizens aren’t the only ones fleeing the country because they don’t like the direction it’s headed. Corporations expatriate for similar reasons. So why are companies desperate enough about corporate tax to leave the U.S., the champion of freedom and enterprise? Clem Chambers explains here...


Video
Floating Exchange Rates are Causing a “Race to the Bottom”

Kate Incontrera

Milton Friedman is roundly regarded as one of the great economists of the 20th century. But his view of the Bretton Woods system was all wrong. And the current mess of floating exchange rates proves that. Today, Lewis Lehrman explains how the current monetary system pits every country against each other in a financial "race to the bottom"...