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
3 Ways to Identify Your Own Private American Oasis

Addison Wiggin

No matter where you live in the US, it seems like some federal employee has his hand on your wallet. That said, not all states are created equal in that regard. And so today, Addison Wiggin details which states offer you the least intrusive options when it comes to dealing with the various levels of government. Read on...


The One Number Every Penny Stock Investor Overlooks

Jonas Elmerraji

When it comes to investing in small companies with explosive growth potential, there is one number investors tend to be fixated on: share price. But as Jonas Elmerraji explains, there is another number that is far more important when it comes to discovering quality investments on the cheap. Read on...


Winners and Losers in the Battle of Economic Stupidity

Douglas French

A lot of people are buying to a lot of bad ideas right now, based on faulty logic or blindly following a political agenda. But if you ask the right questions, you can expose these ideas, as well as the people who support them, and show how silly (and stupid) they really are. Thankfully, one man has been doing just that for decades. Doug French explains...


Smart Investments in the Mobile Revolution

Greg Guenthner

The world is obsessed with smartphones. Most people can't go ten minutes without checking their phone for status updates on Facebook or Twitter or any number of apps they happen to have. And while Facebook's stock continues to soar, it's only natural to wonder, "What's the best way to play this mobile revolution?" Greg Guenthner explains...


The US Debt Crisis that Will Never Happen

Chris Mayer

One of the most heated political battles raging across the western world is debt versus austerity. In the U.S. this debate reached it's apex in 2011 when the U.S. credit rating was downgraded by Standard and Poor's. In today's essay, however, Chris Mayer throws the debate out the window, explaining why he thinks a U.S. debt crisis will never happen...