There is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.

Which brings me to Standard & Poor’s. They put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.

To which I say “Who Cares?

Its not that I disagree with their assessment — I do not — but I pay it little heed. It was much more important to me as an investor that PIMCO’s Bill Gross was out of Treasuries a month ago (and indeed, is short) than what S&P says. That was all any bond investor needed to know — no ratings agency necessary.

If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P.

Consider what Nobel Laurelate Joseph Stiglitz, economics professor at Columbia University in New York observed:

“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

Hence, the “negative outlook” of US debt has come about because the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities. Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political over the debt ceiling.

Of course there is a negative future outlook. Its in large part the work product of S&P and Moody’s.

Why we even have  Nationally Recognized Statistical Rating Organization (NRSRO) any longer following their payola =driven corruption, their gross incompetency and their inability to discharge their basic duties is beyond my understanding.

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Countries with S&P Triple AAA Credit Ratings

Click for larger table

Source: Bianco Research

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Previously:
Ratings Agencies Abject Failure (April 30th, 2009)

Long Awaited Fixes for Credit Ratings Agencies (May 14th, 2010)

Regulation AB: Downgrading the Ratings Agencies (September 5th, 2010)

Calpers: Rating Agencies to Blame for Huge Losses (July 15th, 2009)

Time for Legal Liability for Rating Agencies (June 18th, 2010)

Category: Bailouts, Credit, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Why Listen to S&P on US Debt?”

  1. louiswi says:

    Barry, the post should have been all caps, bolded, and underlined. Excellent work and should be repeated over and over…

  2. KJ Foehr says:

    Even worse they are now compounding the damage they have already done by piling on and possibly hastening a debt crisis where the markets had not seen (priced one in) before. Will they now be complicit in another economic / financial debacle? It appears so.

  3. Bob A says:

    to which I say…
    we’re supposed to believe GS and other mega market players didn’t have inside information on this last week?
    yea right

  4. mjb says:

    “A huge part of the reason the US is in its awful financial position is due to the fine work of S&P.”

    Wait, S&P is the reason the politicians keep handing out money they don’t have? I’d be interested to hear how you arrive at the conclusion that they contributed in a meaningful way to a near $50 trillion unfunded SS, Medicare and Medicaid liability on top of $9.1 trillion in debt.

    ~~~

    BR: S&P was a major contributor to the booming housing market — they helped create the demand for mortgage backed securities and related Derivatives by falsely labelling them “Investment Grade.” This led to a the worst recession since the great depression, and a plummeting of tax receipts.

    This has nothing to do whatsoever with Social Security or Medicare — except to the collection of Opportunists who use every crisis to push their own agenda

  5. Terry says:

    Don’t disagree with your overall judgment re S&P and ratings agencies generally, BUT…

    S&P seems to have given some warning to investors/traders (else the market wouldn’t have dropped) and Washington that the debt/deficit problem affects our national creditworthiness.

    Yes, the warning was late, and maybe understated (should the US debt be cut a notch?), but apparently it was the 2×4 that got the mule-headed market thinking about the issue. (I’m still doubtful Washington has gotten the message–ideologies are so blinding it.)

  6. DebbieSmith says:

    There is no doubt that the sovereign debt crisis in the Eurozone is becoming increasingly worrisome. However, when put into the context of the overall sovereign debt of the entire world, it is the levels of debt of both the United States and Japan that could prove critical to the world’s fiscal future.

    Here is a summary of the sovereign debt of the world, excluding the $100 trillion debt related to unfunded American entitlement programs:

  7. DW says:

    Interesting they would wait until the last day to make your 401K or IRA contribution for 2010 taxes….

  8. Livermore Shimervore says:

    What was the quote, I can’t find it. something like “if you call a MBS triple A long enough the investor might forget that a house can actually lose half its value”.

    Or Warrant Buffett a couple of years from the top of the bubble “I recently sold my home in Laguna Beach for $14 million. I’t about on an acre. I figure it would probably cost $500K to replace the house if I had to tear it down. Which means its valued at a [zillion] dollar per square foot.”

  9. Livermore Shimervore says:

    btw, Why listen to S&P on the debt?

    “If history teaches us anything it is that it teaches us nothing”

    which probably means that shorting ourselves will make J Pauson shorting the ABX, CDS, etc. look like a $20 bill lost in the laundry. Once PIMCO is in for an ounce the rest of deep pockets will come in eventually for the rest of the ton.

  10. wally says:

    “and their inability to discharge their basic duties”

    If we started getting rid of various agencies based on that standard we’d have very little left.

  11. Global Eyes says:

    Despite a slew of accurate observations and an S&P downgrade, T-Bonds retain their AAA status meaning things couldn’t get any better, right?

  12. [...] Ritholtz: Why Listen to S&P on US Debt?: There is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and [...]

  13. mbelardes says:

    Why should their failure in analysis of MBS influence the value and meaning of their analysis of US Debt?

    Their must be a bias term for thinking that.

    Fact is, market participants care and so what S&P says is relevant. This is just confirmation of many of the statements people like Bill Gross have already been saying and now what he says carries more weight with more people.

    I just can’t write off what anyone says because they were horribly wrong in the past or were part of the cause of the problem. It would be foolish to ignore what S&P says on US Debt because they have been wrong in the past. What S&P says on US Debt is significant.

  14. Lee Gibson says:

    Geithner should just offer them a payoff in exchange for a good rating. That’s what everybody else does.

  15. DL says:

    Obama wants to push off the hard decisions until after the election (and the election after that).

    Anything that prods him into a concrete decision is better than mere rhetorical posturing.

  16. James says:

    To which I say “Who Cares?”

    Clearly the equity markets – at least today. Also, the news media which have splashed it across their front pages, and the public at large who read or hear this news. And almost certainly the administration, the two political parties, and politicians, all of whom will be sharpening their rhetoric – and hopefully, their solutions – in response.

    Whatever one thinks of the rating agencies, this at least helps highlight the issue. Whether it actually takes us any closer to a long-term solution (re: your earlier post where so many are all for a solution – as long as it doesn’t touch them), I’m less hopeful.

  17. @DebbieSmith,

    Hey, that’s not as bad as I thought. In my opinion it is non existent. :)

  18. JAH says:

    Setting aside the merits of S&P’s opinion, would an actual downgrade have an impact if only because certain funds might be legally obligated only to hold AAA paper?

  19. [...] the other hand, Barry Ritholtz writes in the Big Picture blog that given the track record of such ratings agencies, their assessment must be taken with a [...]

  20. [...] much stock should we put into S&P’s views on US credit ratings?  (Big Picture, Felix [...]

  21. larsonian says:

    Barry, in your opinion, what are the odds Congress and the President fail to reach an agreement on raising the debt ceiling in the next few months? I would have always thought zero, but in this environment…

    thanks

  22. wngoju says:

    tlt is up today…

  23. curbyourrisk says:

    “If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them.”

    Damn….I agree. Sat through a 2 day seminar of there’s 2 weeks ago and thought the same thing. Sam Stovall was the biggest blow hard BULL I have ever heard. Not a lot of substance either. I asked a total of 6 questions. 4 of them were ansered with, acording to our data, we cannot answer that question at this time.

  24. curbyourrisk says:

    @ KJ Foehr: “Even worse they are now compounding the damage they have already done by piling on and possibly hastening a debt crisis where the markets had not seen (priced one in) before. Will they now be complicit in another economic / financial debacle? It appears so.”

    WHAT???? Hastening a debt crisis by maiing this downgrade? Are you serious? All they are doing is growing a set and doing what they should have done 2 years ago. They did not initiate the borrowing….they have not bankrupted the UNITED STATES. Yeah, they are a CRAP organization and have FAILED at doing every aspect of their job….but listen up…. THe pending debt crisis is 100% owned by the United States Government, the Treasury, Congress and the Federal Reserve

  25. Bokolis says:

    At this point, does anybody really believe that France, Germany, UK and US are AAA? Judging by that roster, it really does look like the meek are starting to inherit the Earth.

  26. beaufou says:

    “e-mail records in which executives from Standard & Poor’s and Moody’s Investors Service acknowledge compromising the integrity of ratings to win business from big Wall Street firms.”
    http://crooksandliars.com/susie-madrak/big-surprise-huh-ratings-agencies-ble

    Geithner is surely aware that you have to pay for their services.

  27. Ed618 says:

    The ratings agencies’ part in the financial crisis was grossly under-reported. A year or more ago, CNBC ran some internal emails from one of the agencies, basically, “Haha, we can slap an AAA rating on any piece of shit…” But the story never gained any traction, almost as if someone didn’t like that theme.

  28. b_thunder says:

    There’s quite a significant number of fairly dull, unimpressive, average at best ex-Moody’s and ex-S&P employees who for years were stuck rating mortgages, but who have been lately employed by hedge funds and even Big Banks, making several times what they were making before. Who said S&P and Moodys ratings are useless? There people who profit from them!

  29. socaljoe says:

    The rating of US debt may be important, not for what it tells you, but for the reaction it causes in other investors and possibly foreign central banks. It is, after all, they who determine the prices of the assets you own.

    It is also important to remember that significant outcomes, whose fundamental causes are preexisting conditions, are triggered by seemingly trivial events.

  30. KJ Foehr says:

    curbyourrisk wrote:

    “THe pending debt crisis is 100% owned by the United States Government, the Treasury, Congress and the Federal Reserve”

    What debt crisis? There is no debt crisis. Rates are low. There are no bond vigilantes attacking our government bonds. There is only a perception of a debt crisis being created by those who want to reduce government spending and government authority in order to make the rich richer by reducing taxes and eliminating regulation of business. And they want to create fear in the electorate in order to win more power in 2012 and really hand what is left of our democracy over to the corporations and the wealthy.

    By entering the fray now and announcing their change to “outlook negative”, S&P is only adding to the perception of a crisis. When they got paid to rate MBS crap, they only painted a rosy scenario. But now unnecessarily turning against the lender of last resort, the only source of funds that saved the TBTF corporations when the house of cars THEY created collapsed, is hypocrisy and an unconscionable lack of gratitude. It would be far better for them to stay silent on the issue, until if and when there is real evidence that government bond holders could be at risk.

    There is no such evidence now. There is only speculation and hysteria manufactured by demagogues to manipulate the masses to achieve their own ends.

    Take a look at this list of public debt by country. We are 37th! And just below the average of the world!

    Country Comparison :: Public debt

    Rank country (% of GDP) Date of Information
    1 Japan 225.80 2010 est.
    2 Saint Kitts and Nevis 185.00 2009 est.
    Lebanon 150.70 2010 est.
    4 Zimbabwe 149.00 2010 est.
    5 Greece 144.00 2010 est.
    6 Iceland 123.80 2010 est.
    7 Jamaica 123.20 2010 est.
    8 Italy 118.10 2010 est.
    9 Singapore 102.40 2010 est.
    10 Belgium 98.60 2010 est.
    11 Ireland 94.20 2010 est.
    12 Sudan 94.20 2010 est.
    13 Sri Lanka 86.70 2010 est.
    14 France 83.50 2010 est.
    15 Portugal 83.20 2010 est.
    16 Egypt 80.50 2010 est.
    17 Belize 80.00 2010 est.
    18 Hungary 79.60 2010 est.
    19 Germany 78.80 2010 est.
    20 Nicaragua 78.00 2010 est.
    21 Dominica 78.00 2009 est.
    22 Israel 77.30 2010 est.
    23 United Kingdom 76.50 2010 est.
    24 Malta 72.60 2010 est.
    25 Austria 70.40 2010 est.
    26 Netherlands 64.60 2010 est.
    27 Spain 63.40 2010 est.
    28 Cote d’Ivoire 63.30 2010 est.
    29 Jordan 61.40 2010 est.
    30 Cyprus 61.10 2010 est.
    31 Brazil 60.80 2010 est.
    32 Mauritius 60.50 2010 est.
    33 Ghana 59.90 2010 est.
    34 Albania 59.30 2010 est.
    35 World 59.30 2010 est.
    36 Bahrain 59.20 2010 est.
    37 United States 58.90 2010 est.
    … and then the rest of the list to #132
    https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

    When Japan has a government debt crisis, then we should worry. Until then we only have a long-term problem that needs to be addressed.

    And look at Germany, which is seen as the financial savior of the big EU debtor countries, it is 19th on the list at 78.8% of GDP, while we are at 58.9%.

    Obviously we do need a sea change to begin now to take our deficit and debt down, but it is far from a crisis.

    .
    There is no debt crisis in this country, only a crisis of ignorance and a lack of free thinking.

  31. curbyourrisk says:

    KJ Foehr….You are seriously delusional.

  32. willid3 says:

    i am wondering if their real trigger wasn’t the actual or perceived debt, but that the Congress and Administration won’t come to an agreement on the debt ceiling thus causing a default?

  33. willid3 says:

    mjb Says:
    April 18th, 2011 at 11:40 am

    “A huge part of the reason the US is in its awful financial position is due to the fine work of S&P.”

    Wait, S&P is the reason the politicians keep handing out money they don’t have? I’d be interested to hear how you arrive at the conclusion that they contributed in a meaningful way to a near $50 trillion unfunded SS, Medicare and Medicaid liability on top of $9.1 trillion in debt.
    _________________________________________________________________________________
    when i see these i also ways wonder. how they come up with these numbers. are they thinking that every one alive today that is SS, Medicare, and Medicaid are going to live for 50 years and add on the current population? and just how likely is that? that nobody in retirement won’t pass away? or that todays population will also not have some reductions? or that nobody will ever address the real reason for health care inflation, the fee system? or that no changes to the tax rates (removing that loop hole on incomes over 106,000 for example. might also fix the problem we have with over paid executives too?)
    and why isn’t the same bunch with the sky is falling routine not much more alarmed by private debt which is many magnitudes higher? and while we are at it, we could look at the debt of any major corporation, and get really concerned because their debt if due on the same day would over whelm them?

  34. BillG says:

    Since the US government only borrows in dollars and has constitutional authority to create those dollars (which they then delegate to the federal reserve who loans them as many of said dollars as they want and gives the profits from that lending back to them at the end of the year) then why would they ever need to default on debt? The whole idea of assigning the US government a credit rating at all makes no sense to me until the day comes when they borrow substantial amounts of money in somebody else’s currency for whatever reason.

    Can anyone in our entire economy borrow money at a lower rate than the federal government? And forget about the short term rates that are constantly under the manipulation of the fed, I’m talking long term free market rates. Can anyone get a lower rate on a 10 year bond than Uncle Sam? Save for AAA munis (only because of the tax advantage) I doubt it. So to me this just makes the US government’s credit the baseline credit rating for all dollar denominated assets all over the world. Lowering their rating says to me that all dollar denominated assets are more likely to default than euro denominated assets or yen denominated or whatever. But that gets back to my original point – why, when you can just print more money or borrow more money from the fed would you default? And if you aren’t going to ever default then why would you have anything but the highest credit rating?

    Maybe I’m missing something here so if someone would like to clear things up that would be cool.

  35. V says:

    Not that I disagree with the sentiments, but those country ratings are the Local Currency ratings.
    The in foreign currency ratings are slightly different for some of the named countries on the list.

    Of course any sovereign issuer of it’s own currency is AAA in it’s own currency, whether that currency is worth anything is another matter.

  36. KJ Foehr says:

    @curbyourrisk

    Ha!

    To paraphrase John Lennon, “You May Call Me Delusional, But I’m Not the Only One”.

    http://www.ritholtz.com/blog/2011/04/david-levy-deficit-spending-is-helping-not-hurting-the-economy/

  37. Bill Wilson says:

    “The job of the ratings agencies is to walk onto the battlefield when the fighting is over and shoot the wounded.”

    I can’t remember who said that. I think it’s true.

  38. Hugh says:

    Some misdirected anger in some of these posts.

    When your credit card is refused at the restaurant it’s normal to get angry with the waiter. Normal but not right.