Washington and Wall Street Asked for S&P's Downgrade

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http://www.theatlantic.com/business/archive/2011/08/washington-and-wall-street-asked-for-s-ps-downgrade/243274/

"Okay Congress: You want us to be more aggressive with our ratings and not just stamp AAA on any old bond? Then how about this -- you're downgraded." This proclamation wasn't a part of Standard and Poor's statement on its decision to lower the U.S.'s sovereign debt rating from AAA to AA+ on Friday, but it could have been. The agencies have been taken a beating for their lack of leadership in risk assessment over the years, particularly for their failures during the housing bubble. So what happens when one of them finally takes a bold, contrarian stance? Washington and Wall Street are even angrier.

Remember 2008 through 2010?

Back when the financial crisis struck, investors threw up their hands and began screaming about the rating agencies' incompetence. How could they so foolishly believe that all of those now toxic mortgage securities were rated AAA? Why didn't their assumptions account for the possibility of a big nationwide decline in home prices? Just because it had never occurred before doesn't mean it couldn't occur under certain circumstances one day -- like as the consequence of a giant housing bubble.

Congress agreed. In hearings and panels, the agencies were harshly criticized for not better predicting the future problems in the securities they rated. How could they be so incompetent? And the worst part: they hid behind the First Amendment protection. Congress tried to put an end to that by forcing stricter liability on the agencies. But they managed to wiggle out of that requirement when the market for asset-backed securities briefly ceased as the agencies refused to rate securities due to that new liability.

Both investors and politicians considered the rating agencies a chief cause of the financial crisis. If they had instead led the market to be wary of these mortgage securities -- despite the popular views that the housing bubble wasn't going to end so badly and that home prices couldn't experience deep declines on a national scale -- then the U.S. economy might have avoided it's terrible spill. The agencies should have been bold in declaring the market wrong. That is, after all, their job: to call out the risks that others refuse to see.

[saras]

1. One part I don't understand (or perhaps I just have a leftover bit of naivety)

"Congress tried to put an end to that by forcing stricter liability on the agencies. But they managed to wiggle out of that requirement when the market for asset-backed securities briefly ceased as the agencies refused to rate securities due to that new liability."

Normally, if insurance companies refuse to insure your project, you may reasonably conclude that it's too risky to do. If the ratings agencies refuse to rate a new kind of security, isn't that enough to demonstrate the securities not trustworthy?

More blackmail?

[xchrom]

2. this is stuff that is too 'fancy' for me to understand.

i'm an old ledger book kinda guy.

[bemildred]

3. Congress tried to get the rating agencies to hold the bag for the crisis (in 2008).

The rating agencies went on strike (stopped rating things), thereby halting the market in Ponzi Asset-backed securities, and they (the rating agencies) won their point.

In fact the rating agencies have reason on their side, it is Congress that is at fault, for their failure to regulate the markets, for rescinding Glass-Steagal, and for drink the free-market KoolAid like a wino with a bottle of Gallo Red. The rating agencies were and are just well-paid tools doing as they were told. They are being belabored now for trying to resume doing their job honestly.

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4. I whole heartedly agree w/ your assesment.

[saras]

5. That's what India thought - so they didn't buy in - so they didn't get screwed.