Arrogance of Self-Appointed Judges of U.S. Credit

First, S&P and Moody have made hash out of their duty to be independent and assess the worthiness of bucketsful of real estate-related securities in the first decade of this century. Now on the rebound they are trying to regain their balance and reputations by heroically assessing and talking about their intentions to DOWNGRADE the AAA rating of the credit of the United States of America. I have seen a lot chutzpah in my 80 years. This may take the cake!

While it is true that it may seem late to be criticizing them for downgrading, since they have been holding a AAA rating for decades, it now seems clear that they should never have been rating U.S. government credit because whenever they changed their mind the horrible situation that now prevails was inevitable and should have been anticipated.

Their gall in sitting in judgment appalls me because, while the first amendment obviously applies, there is one major exception to the first amendment which is that “one cannot cry fire in a crowded theatre.” This bit of theatre coming out of Washington (and it is real political theatre with all its foibles) is crowded beyond debate. They are piling on in ugly fashion and making a bad situation worse.

And beyond the bad taste and judgment they are exhibiting, they are probably (or should be) violating some National Security law which prohibits people from doing or saying treasonous things which could be harmful to the national interest. And, even if they are and/or turn out to be right, their involvement is likely to have a self-fulfilling effect on the outcome. Therefore they have a serious conflict of interest (brought about by their motives at this time) which should be immediately and thoroughly reviewed in the national interest.

And, even if they are right, (which they very well may be), they are brutally and blatantly entering the political arena and trying to affect the political process. While I agree with almost everything they have said, and I normally would metaphorically kill to protect their right to say whatever they think, this case is so special and different I think their whole involvement in the sovereign rating of the U.S. should be reconsidered.

Moreover, what they are doing is not necessary. The bond markets do not need their views to make assessments of the situation. The markets by themselves are the best indicator of what everyone needs and wants to know. Rating agencies exist to tell investors what they cannot easily learn on their own. Our domestic bond and equity markets and the global market for the dollar, are open and transparent and are better judges of the sovereign risk of the United States than traditional commercial credit analysts. At best or worst, rating agency views are most likely misleading icing on the cake.

Ironically there is one plus to their mistake: it should put increased pressure into the political system to fix the problems. Still, it seems inappropriate for such a group of incompetents to be this deeply and importantly involved in such an important political problem — even if they are, in fact, correct!

There is another related problem with PIMCO, probably the largest owner/manager of fixed income securities including vast quantities of U.S. treasuries of various denominations and duration. Pimco has been in recent months making very clear their negative view on U.S. credit and they claim they have sold all their U.S. treasuries. NOW they are making loud pronouncements AGAINST the credit standing of the U.S. contributing to further weakness in those markets. Don’t they have a rather serious conflict of interest? It smacks of promoting a run on a bank to benefit from the fall of the bank shares to cover a short position. It may be one thing to attack a bank but perhaps there is or should be a national security issue in promoting a run on the credit of the U.S.  If a foreign government were doing such a thing, there surely would be a big stink!

These are unusual issues that may be a case of first impression, because this may be the first situation in modern times in which these kinds of facts have occurred and come together. At a minimum it would be a good idea to air widely these issues now and start a discussion.


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